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The first results are in, and Wall Street strategists issuing 2025 forecasts see the S&P 500 (^GSPC) rally continuing over the next twelve months.
But missing from their basic calls is one of the hottest themes of the last eighteen months in the markets: artificial intelligence.
AI driving the market higher has been a hallmark of market calls dating back to the spring of 2023, when Nvidia’s first massive earnings report of the cycle sparked a roaring bull market rally.
On Monday, BMO Capital Markets chief investment strategist Brian Belski initiated a year-end target of 6,700 for the S&P 500 through 2025. Meanwhile, Morgan Stanley chief investment officer Mike Wilson issued a 6,500 target for the next twelve months.
Neither leaned too far into the impact of AI driving stocks higher – perhaps a sign of a maturing bull market – and instead both discussed further broadening the rally away from the tech-focused stock market of the past two years.
“We expect this broadening of earnings growth to continue as the Fed cuts rates next year and business cycle indicators continue to improve,” Wilson wrote.
Belski’s work shows that the market has already broadened, with 276 stocks outperforming the S&P 500 in the second half of 2024 – better than the 10-year average of 238 and above the number since early 2023.
On the face of it, this could lead to weaker profits for the index, as smaller profits at small companies mean smaller overall profits. Dating back to 1990, Belski found that when the top 100 stocks in the S&P 500 outperform, the index produces an average annual return of 11.8%, compared to the average return of 8% when those stocks underperform the index.
In other words, the returns are not bad; they’re just not as great as the ones investors have been enjoying for two years now.
To be clear, the idea that an AI-related fever could continue to drive stock prices higher has not been forgotten among Wall Street strategists. Just two weeks ago, Evercore ISI’s Julian Emanuel wrote that he expects the S&P 500 to reach 6,600 by June 2025 as “exuberance lies ahead” amid a “public once again engaged in speculation.”
Wilson made a bull case in which widespread AI adoption is undermining margins – pushing the flagship index towards 7,400.
Of course, that sounds like an attractive scenario for any investor in the S&P 500. But perhaps even more compelling is that strategists no longer have to rely on AI to explain why the market will continue to move higher. Even if AI doesn’t show up to the party, Wall Street expects a good time.
