Large-capitalization U.S. stocks have outperformed virtually all comers over the past 15 years. According to some of the world’s largest investment banks, that is unlikely to change in 2025.
Wall Street analysts have recommended that investors continue to favor shares of the biggest American companies as the S&P 500 index SPX looks likely to deliver a total return north of 25% for the second-straight year, a rare accomplishment.
Teams at Deutsche Bank, Goldman Sachs Group, UBS Group, Barclays, Société Générale and JPMorgan Chase & Co. have all recommended that investors focus on the U.S. next year, although some see pockets of value abroad as well.
Most expect the biggest opportunities could be found in shifting market leadership, as investors increasingly diversify away from the Big Tech stocks that dominated the market in 2023 and 2024. Many, including J.P. Morgan’s global markets strategy group led by Dubravko Lakos-Bujas, see financials and utilities as potential beneficiaries.
Although Lakos-Bujas also believes Japanese stocks look compelling, he is much more downbeat on the outlook for the eurozone and emerging markets.
That is not to say there aren’t risks, even in the U.S.
High valuations for the biggest American firms and lingering questions about the incoming policy agenda in Washington could knock the rally off track, or at least introduce more volatility. Rising Treasury yields are also making some nervous, as Trump’s tariff agenda is widely expected to be inflationary.
But a still-strong economy and the lopsided benefits of the artificial-intelligence revolution should continue to favor U.S. stocks.
“The U.S. exceptionalism story could face turbulence and heightened volatility on the back of policy changes in 2025, but opportunities are likely to outweigh risks,” JPMorgan’s Lakos-Bujas said in a report.
The chorus of bullish calls comes as domestic stocks see their share of the global equity market climb to its highest level since late 2001, according to FactSet data, which showed the U.S. market capitalization accounted for more than 50% of the value in the global equity market.
One strategist, Albert Edwards at SocGen, even recently invoked a once-popular acronym — “TINA,” which stands for “there is no alternative” — to describe the perception that U.S. stocks appear to be the only game in town.
Valuations are high, but so are earnings expectations
Most bullish Wall Street strategists touted the myriad advantages harbored by the biggest U.S. firms. Superior earnings growth could continue to push prices higher and justify the recent multiple expansion that has pushed valuations higher.
“The earnings expectation in the U.S. is quite healthy,” said Venu Krishna, chief U.S. equity strategist at Barclays, in an interview with MarketWatch.
While Big Tech should continue to account for the bulk of this growth, other firms are slowly but surely catching up.
“The fulcrum for earnings strength remains centered on Big Tech. But directionally, the rest of the market is moving along the right path, although at a much slower pace than expected.”
The incoming Trump administration’s preference for corporate tax cuts and deregulation could help further pad companies’ bottom lines, while boosting the economy with more deficit spending.
A stock picker’s market
One common theme was dispersion — the notion that the sectors and companies leading the market higher in 2025 could look different from what investors have grown accustomed to in 2023 and 2024. Lakos-Bujas said uneven performance among sectors, styles, themes and countries could create a stock picker’s market.
This has already started to take shape during the second half of 2024, as more sectors have joined in the rally. Financials have even soared ahead of information technology, boosted by expectations surrounding Trump’s deregulation agenda.
To be sure, Wall Street professionals haven’t completely dismissed the benefits of investing abroad. Some have pointed out that international stocks haven’t been very effective as a diversifier lately.
But others, including a team from JPMorgan’s asset-management business led by Chief Global Strategist David Kelly, argued that low valuations in foreign markets are simply too compelling to pass up.
His colleague, Lakos-Bujas acknowledged the possibility that a convergence trade could begin later in 2025, driven by the yawning gap in valuations and a shifting global outlook.
“In the meantime, lack of a quality substitute to U.S. equities remains the reality,” he said.
American (tech) exceptionalism
For decades now, the U.S. economy has been the locus of global technology innovation.
In the past, this ”tech exceptionalism” — as Krishna called it — meant pioneering the development and use of the internet. Today, it means being at the forefront of trends involving artificial intelligence and cloud computing.
This is unlikely to change soon, which is one reason why Krishna expects U.S. markets will continue to dominate. Although substantial uncertainty remains about the return on companies’ investments in artificial intelligence, over time, it will likely boost productivity and make U.S. firms even more profitable.
Recently, the U.S. economy has also proven resilient to some of the pressures that have afflicted the eurozone and China. Even as the Federal Reserve hiked interest rates aggressively to combat a powerful burst of inflation, the U.S. labor market has seen only a modest slowdown.
According to the latest data, GDP grew at 2.8% clip during the third quarter, faster than other developed markets, even as a longstanding slump in manufacturing activity persisted.
Even if the pace of global economic growth were to slow next year, as many expect, U.S. stocks could continue to benefit.
That is because weaker growth abroad makes U.S. stocks even more attractive to foreign investors, according to strategists at UBS Group.
American households also have more of their net worth tied up in stocks than their peers abroad, which helps to magnify the economic boost from the “wealth effect” when the market is rising, the UBS team said.
“The positive wealth effect of the stock market is higher in the U.S. than elsewhere because household ownership of equities is much higher than in other countries,” the UBS team said.
Strategists at Deutsche Bank recently unveiled a 2025 year-end price target of 7,000 for the S&P 500, one of the more bullish forecasts on Wall Street.
Where the team sees risks ahead, they are mostly tied to Trump’s policy agenda. Things could go south if the new administration decides to pursue aggressive across-the-board import tariffs.
Barring this, Deutsche expects a second Trump administration will help boost corporate profits and the broader economy, while his trade policies could make it even more difficult for other economies and markets to keep up.
Risks remain
It is worth noting that Wall Street’s expectations for how things might play out during the coming year rarely pan out, especially when the consensus is so strong, and few appear willing to rock the boat with bold calls. At least, that was the case in 2023, when a bull market in U.S. stocks emerged more quickly than many professionals had expected.
Brent Donnelly, president of Spectra Markets, said that most of the year-ahead outlooks he has seen appeared to extrapolate out what has already been happening during the second half of 2024.
“I will write much more about the 2025 outlook, but for now it seems that forecasters are herding around a base case that looks like an extrapolation of 2024,” Donnelly said in commentary recently shared with MarketWatch.
“This seems off base to me given the brand-new shock and awe administration that will kick off with leaks in the first few weeks of January and new policies shortly thereafter.”
That could mean that the real opportunities await those willing to go against the consensus.
U.S. stocks managed to finish higher on Tuesday after the president-elect issued a tariff threat targeting Mexico, Canada and China. That didn’t stop the S&P 500 SPX and Dow Jones Industrial Average DJIA from tallying fresh record closes. The Nasdaq Composite COMP finished higher, but remained shy of record territory.
Stocks started in the red on Wednesday, with the S&P 500 and Nasdaq seeing a modest pullback while the Dow continued to climb.
