S&P 500: Wall Street’s Forecasts for 2025 May Be Too Bullish to Be True

It’s that time of year when Wall Street polishes up its crystal balls and predicts next year’s market returns. Since Wall Street never predicts a down year, these forecasts are often wrong and sometimes very wrong. For example, on December 7th, 2021, we wrote an article about the predictions for 2022.

“There is one thing about Goldman Sachs that is always consistent; they are ‘bullish.’ Of course, given that the market is positive more often than negative, it ‘pays’ to be bullish when your company sells products to hungry investors.

It is important to remember that Goldman Sachs was wrong when it was most important, particularly in 2000 and 2008.

However, in keeping with its traditional bullishness, Goldman’s chief equity strategist David Kostin forecasted the S&P 500 will climb by 9% to 5100 at year-end 2022. As he notes, such will “reflect a prospective total return of 10% including dividends.”

The problem, of course, is that the S&P 500 did NOT end the year at 5100.

Then, in 2022, Wall Street suggested that 2023 would be a meager return of just 3.9%.

Of course, reality turned out to be markedly different.

It was the same in 2023 for 2024 as analysts wildly underestimated the valuation expansion, which sent the index up nearly 30% for the year.

However, while analysts repeatedly fail at the guessing game, Wall Street’s annual tradition is always of higher returns. To borrow a quote:

“(Market) Predictions Are Difficult…Especially When They Are About The Future” – Niels Bohr

Okay, I took a little poetic license, but the point is that while we try, predictions of the future are difficult at best and impossible at worst. If we could accurately predict the future, fortune tellers would win all the lotteries, psychics would be more prosperous than Elon Musk, and portfolio managers would always beat the index.

As investors, we must rely on our data, analyze what occurred previously, weed through the present noise, and discern the possible future outcomes. The biggest problem with Wall Street today and in the past is its consistent disregard for the unexpected and random events that inevitability occur.

We have seen plenty in recent years, from trade wars to Brexit to Fed policy and a global pandemic. Yet, before those events caused a market downturn, Wall Street analysts were wildly bullish that it wouldn’t happen.

So what about 2025? We have some early indications of Wall Street targets for the S&P 500 index, and, as is always the case, they are primarily optimistic for the coming year. The median estimate is for the market to rise to 6600 next year, which would be a disappointing return of just 8.2% after two years of 20% plus gains. However, the high estimate from Wells Fargo suggests a 14% return, with the low estimate from UBS of just a 5% return. Notably, there is not one estimate available for a negative return.

There are several risks to these forecasts.

Estimating The Outcomes

The problem with current forward estimates is that several factors must exist to sustain historically high earnings growth.

1. Economic growth must remain more robust than the average 20-year growth rate.
2. Wage and labor growth must reverse to sustain historically elevated profit margins, and,
3. Both interest rates and inflation must reverse to very low levels.

While such is possible, the probabilities are low, as strong economic growth can not exist in a low inflation and interest-rate environment. More notably, if the Fed cuts rates further, as most economists and analysts expect next year, such will be in response to a slowing economic environment or financial stress. Such would not support more optimistic earnings estimates of $251 per share next year. This represents roughly a 19% increase from Q4-2024 levels. (In 2023, estimates for 2024 suggested a 14% increase, which was just 9%. The long-term trend of earnings growth from 1900 to the present is just 7.7%)

ByLance Roberts