Excitement around artificial intelligence and expectations around the growth cycle of the U.S. economy will likely fuel another strong year for equities on Wall Street in 2025, according to analysts at Investing.com – Capital Economics.
Despite a somewhat disappointing finish to 2024, the main US indices all posted double-digit annual gains, notably recording the best two-year performance since 1997-1998.
Much of the optimism was fueled by the Federal Reserve’s decision last year to begin cutting interest rates from multi-year highs.
Policymakers have pointed to an ongoing easing of inflationary pressures after a peak in 2022, though some have flagged that the pace of moderation has cooled in recent months. Fed Chair Jerome Powell said at a press conference last month that while policy is in a “good place,” the central bank will now take a more “cautious” approach to further cuts.
Elsewhere, a surge of interest around AI has led to a jump in many stocks exposed to the latest technology. Nvidia (NASDAQ: ) emerged as the biggest global gainer in terms of market capitalization in 2024, thanks in large part to rising demand for its AI-centric chips across a range of industries. The company grew by more than $2 trillion in market value in 2024, ending the year at $3.28 trillion, giving it the second-highest valuation among the world’s listed businesses.
The administration of incoming President Donald Trump, and a raft of victories for other Republican candidates in key November elections, have also raised hopes that businesses will benefit from a new era of looser regulations and tax cuts. Still, uncertainty remains over Trump’s plans to impose massive deportations along with tougher tariffs — and whether the moves could reignite inflation.
Yet in a note to clients, Capital Economics analysts said they think “outstanding” returns for US equities in 2024 will “continue in the same vein” this year. They forecast a total return of about 20% over the year from MSCI’s USA-focused index and a gain of about 10% from MSCI’s world index excluding the US.
“This is because we expect the key drivers that have boosted the US stock market over 2024 to continue this year,” the analysts wrote.
He said hype around AI is seen supporting the stock prices of large US technology firms, “especially through higher valuations,” while such growth is expected to spread across the stock market.
He added that the US economy should maintain its recent record of outperforming other major advanced economies, although he said Trump’s policies would be “net, negative for growth.”
“But that only means we project to the US [will] Analysts at Capital Economics said we could outperform other developed economies by a narrow margin over the next few years compared to before Trump’s victory.
