Key reasons S&P 500 will surge another 10% in 2025

A “cyclical inferno” is set to keep the heat under Wall Street’s record-breaking run after a leading US bank forecast a year-end 6666 for the S&P 500 index.

Bank of America’s projection adds a “6” to 2009’s low of 666, meaning the leading benchmark is on track for an annualised return of 14.7% over the subsequent 17 years.

The S&P 500 has risen 50% over the last two years to set a series of record highs during 2024, with November’s 5.9% the best month of the year to date after a 4.3% post-election bounce.

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Anticipation for a more modest 11% increase in the S&P 500 by the end of next year means the bank sees more opportunities in stocks rather than the index itself.

It said: “We prefer high-quality, healthy balance sheet, GDP-sensitive companies with cash return potential and limited refinancing risks - there are many to be found in the S&P 500.”

The bank’s preference for cyclical areas of the market that are relatively undervalued means it is overweight in Financials, Discretionary, Materials, Real Estate and Utilities.

In its year ahead document, BofA flagged nine reasons why investors should “get ready for a cyclical inferno” in 2025.

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These are led by Donald Trump’s Red sweep in November’s US elections, the potential for Federal Reserve interest rate cuts and broadening profit growth. It also highlighted the lightest positioning in cyclical sectors since at least the global financial crisis.

Earnings are forecast to lift 13% year-on-year to $275 per share, with Wall Street consensus expecting 96% of companies to show growth by the final quarter of 2025.

On Trump 2.0, the bank sees the range of outcomes as more balanced than the current market positioning of either “remarkably bullish” or “very negative”.

The bank said: “Higher tariffs are negative, but accelerated re-shoring investments are positive. Corporate tax cuts are deficit negative but the pass-through of benefits to consumers is disinflationary and could drive non-US multinationals to move to the US.

“Tighter immigration and wage inflation could hurt corporate margins and stymie Federal Reserve cuts, but real wage growth is a positive for discretionary spending.”

BofA adds that lighter regulation would be a positive for banks, which now have strong balance sheets and are focused on cash returns and could also now see loan growth.

A pick-up in M&A may result from reduced regulatory scrutiny, while barring a spike in rates or inflation or a fully-fledged trade war, the seeds have been sown for a strong GDP upcycle.

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The outlook has similarities with the late 1990s to early 2000s as a few large expensive stocks make up a third of the index.

This euphoria comes just as Magnificent Seven earnings are slated to decelerate, whereas average company’s earnings are forecast to accelerate.

The bank notes a larger opportunity set with more valuation support in an unloved, unfollowed area of the market: large-cap value stocks.

It said: “Many large-cap value stocks have competitive yields to investment-grade credit spreads. Large tech companies have also signalled that they can morph into dividend payers over time, another reason we are sanguine on the S&P 500 versus our outlook in late 2021.”