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After a remarkable year, some Wall Street analysts believe that S&P 500 in the US it could reach 7,000 by 2025. I can’t blame them for being so optimistic.
More to come?
Truth be told, the S&P 500 has been crying for a while now. A 16% gain in the pandemic year of 2020 was followed by almost 27% in 2021. Things improved in 2022 with a 19% decline. But bulls were charged again in 2023 with a 24% increase. A similar achievement seems possible when we hear the closing bell on New Year’s Eve. With such intensity, it is difficult to resist the crowd.
Of course, most of this heavy lifting has been done by a small group of stocks like the chipmaker Nvidia (NASDAQ: NVDA).
If any company was in the right place at the right time to capitalize on all things AI, it’s definitely this one. Revenue and profits have been beating expectations as customers have spent billions of dollars on graphics processing units (GPUs) to outpace competitors.
And it’s hard to bet against this form continuing. Number-crunchers think revenue for FY25 (ending January) will reach around $130bn. That’s more than double what Nvidia made in FY24.
The problem is that its rating has risen to uncomfortable heights. What happens if/when those orders begin to be limited?
They took out the bears
But it’s not just the tech titan that looks so bubbly. According to the cycle-adjusted Schiller price-to-earnings (P/E) ratio, the S&P 500 has been twice as expensive as before. The last time was November 2021 (note what happens with that fall 2022). The past was during the dotcom boom of 1999.
On top of this, there are concerns that the introduction of punitive tariffs by Donald Trump may reflect inflation. That will not be good for interest rates. Sadly, markets resented Federal Reserve Chairman Jerome Powell’s warning that fewer rate cuts are now expected in 2025.
All this before we consider the potential impact of other geopolitical developments on market sentiment.
Long-term focus
Considering both sides, I can say with confidence that I don’t know where the S&P 500 is going next year! But I don’t need to worry either. The only people who might be eligible are those who want to kill in 2025.
At that point the horizon is not conducive to investing, at least for a dedicated Fool like me. In fact, one might say it is very similar to gambling. And the big gambler often needs an edge — either in the form of experience or access to more data or cool air.
I sure don’t have that edge. But considering that most professional fund managers can’t beat the US index consistently, I’m not sure they do either. However, they still want their hard earned money to try, bless them.
No, I put my faith in the not-so-secret sauce of compound interest and the knowledge that, over time, the direction of travel for the S&P 500 has been up and to the right.
I believe that momentum will continue. And that’s why I’m going to keep draining the US market (and elsewhere) in 2025.
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