The US stock market could potentially experience gains exceeding 20% in 2025, as projected by Capital Economics. This would mark the third consecutive year of such substantial gains for the benchmark index. Anticipation surrounding artificial intelligence (AI) advancements and the robustness of the US economy are expected to be the primary driving factors behind this year’s market resilience.
According to strategists at Capital Economics, the US stock market is poised to achieve a remarkable feat by achieving over 20% gains for the third consecutive year in 2025. If this forecast materializes, it would only be the second instance in the history of the stock market where such remarkable gains were achieved for three consecutive years. The last time the market witnessed a hat trick of 20%+ gains was during the dot-com bubble in the late 1990s, with the S&P 500 registering a 31% increase in 1997, followed by gains of 27% in 1998 and 20% in 1999. Notably, the S&P 500 delivered returns of approximately 24% in 2023 and 23% in 2024.
Capital Economics’ analysis emphasizes that the momentum driving the ongoing bullish market trend is expected to persist in 2025, fueled by investor enthusiasm for AI technology and the underlying strength of the US economy. Diana Iovanel, senior markets economist at Capital Economics, highlighted that the prevailing optimism surrounding AI developments is likely to further propel the prices of US ‘big-tech’ stocks, particularly through increased valuations, leading to widespread gains across the stock market. Notably, Iovanel pointed out that current valuations of US stocks remain below the peak levels witnessed during the dot-com bubble era in terms of price-to-earnings ratios, suggesting potential for further growth. Additionally, the excess earning yield in sectors housing big-tech stocks, a valuation metric factoring in real ‘risk-free’ yields, continues to exceed levels observed during the peak of the dot-com bubble, indicating room for continued expansion.
Another significant factor underpinning the anticipated strong performance of the US stock market is the robust state of the US economy relative to its international counterparts. Iovanel noted that the US economy is expected to outshine major advanced economies in 2025, thereby bolstering corporate earnings outlook. Furthermore, the potential re-election of Donald Trump and the continuation of his administration are viewed as factors that could enhance the attractiveness of the US stock market compared to global markets, partly due to proposed trade policies. Iovanel suggested that while a second Trump administration might impose limitations on the absolute performance of the US stock market, it is anticipated to bolster its relative performance by constraining the prospects of non-US equities through the imposition of universal tariffs.
In conclusion, the US stock market is forecasted to maintain its upward trajectory in 2025, with expectations of significant gains exceeding 20% for the third consecutive year. The convergence of factors such as AI enthusiasm,
