4 Factors Driving the 2025 Stock Market Rally
The S&P 500 has experienced an exceptional rally over the past two years, with gains exceeding 20% annually. As 2025 approaches, maintaining this momentum will require the alignment of several critical factors. LPL Research has outlined 4 primary drivers that could determine whether the market continues to thrive or falters.
1. Avoiding a Recession
Economic resilience is paramount for the stock market to sustain its upward trajectory. Historical data suggests that the third year of a bull market often delivers average gains of about 5%, but this is contingent on sidestepping a recession. LPL emphasizes that recessions, coupled with overly aggressive Federal Reserve policies or excessive speculation, have historically cut bull markets short.
With the U.S. GDP currently tracking an annualized growth rate of 3%, the economy appears robust. Some experts have even estimated a 0% chance of recession for next year. Unless a significant external shock disrupts this momentum, the economic outlook should support further gains.
2. A Dovish Federal Reserve
The Federal Reserve's policy direction is another critical factor. Despite some hawkish signals earlier this year, LPL Research maintains a base case for at least two rate cuts in 2025, assuming inflation continues to ease. Historically, the S&P 500 has delivered solid returns following a Fed rate-cutting cycle, especially in the absence of a recession. On average, the market has seen gains of 5.5% in the 12 months following the initial rate cut, with even stronger performance when economic conditions are stable.
Although volatility spikes often accompany recalibrations in rate expectations, the Fed’s anticipated trajectory of lowering borrowing costs should act as a tailwind for stocks.
3. Strong Corporate Earnings Growth
Corporate earnings are the cornerstone of long-term stock market performance. With high market valuations, earnings growth becomes essential for further price appreciation. LPL forecasts a 10% growth in S&P 500 earnings per share (EPS) in 2025, aligning with long-term historical averages but below the consensus estimate of 15%.
This earnings growth will likely be driven by several factors:
- A steady economic environment.
- Limited wage inflation.
- Productivity enhancements from advancements in artificial intelligence.
- Regulatory rollbacks.
LPL’s EPS forecast for 2025 is $260, underscoring the importance of corporate profitability in sustaining the market’s rally.
4. Impacts of Trump Administration Policies
The re-election of Donald Trump introduces a mix of opportunities and risks for the markets. Policies such as deregulation could bolster industries like financial services and energy while stimulating merger and acquisition activity. However, tariffs and protectionist trade measures pose significant risks, as history has shown that such policies can have detrimental effects on economic growth.
Tax cuts may also face hurdles. With a slim Republican majority in the House, passing meaningful corporate tax reductions may be challenging. Even if enacted, these cuts wouldn’t take effect until 2026, limiting their immediate impact on the market.
LPL emphasizes that Trump’s policies must deliver more benefits than costs for the stock market to thrive in 2025.
The Takeaway
For the S&P 500 to sustain its rally into 2025, avoiding a recession, benefiting from a dovish Federal Reserve, achieving strong corporate earnings growth, and navigating Trump’s policies effectively will be crucial. While the outlook remains optimistic, the high bar set by consecutive years of extraordinary gains means investors will need to be prepared for potential challenges ahead.
