After a stunning year, some Wall Street analysts believe the S&P 500 in the US could hit 7,000 in 2025. I can’t blame them for being so optimistic.
More to come?
Truth be told, the S&P 500 has been on a tear for a while now. A 16% gain in the pandemic-riddled year of 2020 was followed by almost 27% in 2021. Things did correct in 2022 with a 19% fall. But the bulls charged back in 2023 with a 24% rise. A similar gain looks likely once we hear the closing bell of New Year’s Eve. With momentum like this, it’s hard to go against the crowd.
Of course, a lot of this heavy lifting has been done by a tiny band of stocks such as chipmaker Nvidia (NASDAQ: NVDA).
If any firm was in exactly the right place at exactly the right time to benefit from all-things AI, it’s surely this one. Revenue and profits have continually surpassed expectations as clients have spent billions of dollars buying up its graphics processing units (GPUs) to get ahead of competitors.
And it’s hard to bet against this form continuing. Number crunchers think FY25 revenue (ending in January) will hit almost $130bn. That’s more than double what Nvidia made in FY24.
The problem is its valuation has surged to unpalatable heights. What happens if/when those orders start to moderate?
Bring out the bears
But it’s not just the tech titan that’s looking frothy. According to the cyclically adjusted Schiller price-to-earnings (P/E) ratio, the S&P 500 has only been more expensive twice before. The last time was in November 2021 (note what happened with that fall in 2022). The previous time was during the dotcom boom of 1999.
On top of this, there are concerns that the introduction of punishing tariffs by Donald Trump could prove inflationary. That won’t be good for interest rates. Tellingly, markets hated Federal Reserve Chairman Jerome Powell’s recent warning that fewer rate cuts should now be expected in 2025.
All this before we’ve even considered the potential impact of other geopolitical developments on market sentiment.
Long-term focus
Taking both sides into account, I can confidently say that I have no idea where the S&P 500 goes next year! But nor do I need to worry. The only people who probably should are those who want to make a killing in 2025.
That time horizon isn’t conducive to investing, at least for a committed Fool like me. In fact, one could say it’s more akin to gambling. And a great gambler usually requires an edge — be it in the form of experience or access to more data or an ice-cool temperament.
I’m certain I don’t have such an edge. But considering that most professional fund managers can’t outperform the US index consistently, I’m not sure they do either. Yet they still want their fat fees for trying, bless ’em.
No, I put my faith in the not-so-secret sauce that is compound interest and the knowledge that, over the long term, the direction of travel for the S&P 500 has been up and to the right.
I believe that momentum will continue. And this is why I’ll keep drip-feeding cash into the US market (and elsewhere) during 2025.
