US Stock Market Eyes 2025 Trifecta Amidst Tariff Tensions

US stock investors are cautiously optimistic for 2025, hoping for a "trifecta" of gains after two strong years. This optimism is fueled by expectations of a solid economy, robust corporate profit growth, and moderating interest rates. However, concerns linger regarding persistent inflation and the potential impact of new tariffs.

Hopes For A Third Consecutive Year Of Gains

After the S&P 500 posted back-to-back years of over 20% gains in 2023 and 2024, investors are eyeing a rare "trifecta" in 2025. The index soared 53.19% over the last two years, marking its biggest two-year percentage jump since 1998. This bullish sentiment is underpinned by:

• Economic Resilience: Wall Street largely believes the U.S. economy has successfully navigated the Federal Reserve's rate hikes, with 73% of institutional investors surveyed by Natixis Investment Managers expecting no recession in 2025.
• Strong Corporate Profits: S&P 500 earnings per share are projected to rise 10.67% in 2025, according to LSEG, providing a fundamental boost to equity sentiment.
• Moderating Interest Rates: While the Federal Reserve's pace of rate cuts is a key variable, the expectation of easing monetary policy is generally seen as supportive for stocks.

Key Concerns And Potential Headwinds

Despite the widespread optimism, several factors could temper market performance in 2025:

• Stubborn Inflation: Inflation remains above the Fed's 2% target, with the latest consumer price index showing a 2.7% annual rate. A rebound in inflation could prompt the Fed to reconsider its easing cycle.
• Tariff Uncertainty: President Donald Trump's proposed tariffs on U.S. imports, particularly from China, Mexico, and Canada, pose a significant risk. These tariffs could:
  • Increase consumer prices, exacerbating inflation.
  • Hurt corporate profits, especially for companies with significant international revenue.
  • Lead to retaliatory measures from trading partners, impacting global trade.
• Elevated Valuations: The S&P 500 is trading at 24.82 times expected earnings, well above its long-term average of 15.8. While high valuations can persist, they increase the market's vulnerability to negative news or earnings disappointments.
• Geopolitical Risks: While historically not a sustained headwind for U.S. equities, geopolitical flare-ups, particularly in the Middle East, could introduce volatility, especially if they impact oil supply and prices.

Market Performance And Outlook

As of late February 2025, the S&P 500 briefly dipped into negative territory for the year, partly due to a tech-led selloff and renewed trade war fears. However, many Wall Street firms project continued gains for the S&P 500, with year-end targets ranging from 6,000 to 7,000 points. The index ended 2024 at 5,881.

Historically, the S&P 500 has gained an average of 12.3% following back-to-back 20% annual gains since 1950, suggesting further upside potential. However, the market's trajectory will heavily depend on the interplay of inflation, interest rate policy, and the actual implementation and impact of trade tariffs.

Sources

• Investors hope for US stock market trifecta in 2025 after back-to-back boom years, Reuters.
• US stock market: Key questions as second half of 2025 kicks off, Reuters.
• LIVE MARKETS Super Bowl showdown: Will the S&P 500 score or fumble?, Reuters.
• Morning Bid: S&P500 in red for 2025 as trade war fears ratchet, Reuters.