Why 2024 Was Great for Stocks—and Why 2025 Could Be Even Better

Key Points

• The S&P 500 rose 23% in 2024, driven by earnings growth and sector leaders in AI, biopharma, and blue-chip companies.
• Lower inflation and expected rate cuts in 2025 create a favorable environment for stocks.
• Proposed tax cuts, deregulation, and initiatives like DOGE may stimulate economic growth and M&A activity.
• Technology, energy, and infrastructure-related industrials remain key areas for investment.
• A pullback in early 2025 may offer buying opportunities, but geopolitical and economic uncertainties remain risks.

It has been a strong year for stocks, and the best may be yet to come. 

With only one trading day left in 2024, the S&P 500 Index is up approximately 23%. However, as investors look back on the year, they’ll see a textbook example of why the stock market is a poor proxy for the economy, which has delivered unclear and, in some cases, conflicting data points. 

For example, many indicators suggest the U.S. economy is doing well. Consumer spending is stable, unemployment is down, the inflation rate is down from its 2022 highs, and the Federal Reserve has started to cut interest rates. 

On the other hand, oil and gasoline prices are behaving like there’s little demand. Gold and Bitcoin are rising as if a major economic crisis is approaching. And the median wage for U.S. workers, $43,222.81, is only about $12,000 above the poverty level for a family of four. 

Despite this, and with few exceptions, putting money in the market gave investors the chance for the strongest return—and analysts are forecasting an even better year in 2025. 

Why 2024 Was a Great Year for Stocks

The simplest explanation for the market’s strong performance in 2024 is earnings growth. As early as 2022, companies began to shed payroll and undertake other cost-cutting measures to impact the bottom line. Those moves accelerated in 2024. 

However, to the frustration of many buy-and-hold investors, the strongest gains have been limited to a handful of stocks in a handful of sectors. Artificial intelligence (AI) stocks have done well. Much of the attention has gone to companies providing the critical hardware for the AI infrastructure, like NVIDIA Corp. (NASDAQ: NVDA). But as the year comes to an end, investors are looking toward stocks like Palantir Technologies Inc. (NYSE: PLTR)and SoundHound AI Inc. (NASDAQ: SOUN) as the future of AI. 

But AI stocks haven’t been the only ones to see gains. The GLP-1 craze has lifted shares of biopharmaceutical companies like Novo Nordisk A/S (NYSE: NVO) and Eli Lilly & Co. (NYSE: LLY). And companies in other sectors have outperformed the S&P 500, including blue-chip names like Walmart Inc. (NYSE: WMT), JPMorgan Chase & Co. (NYSE: JPM), and American Express Co. (NYSE: AXP).

In each and every sector, earnings have separated the winners from the losers. Companies that showed they could deliver strong earnings and/or raise their guidance have been rewarded—perhaps to excess. Conversely, companies that missed on earnings and/or lowered their guidance have been punished—also perhaps to excess. 

Why 2025 May Be Even Better for Stock Investors

The primary reason to believe that 2025 may be a great year for stocks is based simply on probability. Since 1926, the S&P 500 has delivered a positive return 73% of the time. Over that same period, the index delivered a double-digit return 60% of the time. 

The math is supported by macroeconomic conditions. The last time the S&P 500 delivered a negative return was in 2022. At that time, the rate of inflation was at 40-year highs, and the Federal Reserve was starting its campaign to raise interest rates. Heading into 2025, inflation is sticky but significantly lower than it was in 2022, and interest rates are moving in a lower—and more bullish—direction.

And then there’s that thing known as “animal spirits,” the emotional and psychological factors that influence consumer and investor behavior, often leading to changes in economic activity. There has been a palpable shift in investor sentiment since the U.S. presidential election, and there are many reasons why investors should trust that enthusiasm will last through 2025. 

To begin with, one of the first items of business for the incoming administration will be making the 2017 tax cuts (i.e. the Trump tax cuts) permanent. The president-elect has also pledged to reduce the corporate tax rate from its current level of 21% (which is already the lowest since 1939) to 15% for companies that make their products in the United States. 

But there’s much more for investors to consider. In addition to lowering taxes, the incoming Trump administration wants to cut regulations related to energy production, financial services, healthcare, and environmental protections. Investors are already seeing evidence that this may stimulate mergers and acquisitions (M&A) activity, which has slowed to a crawl under more antitrust scrutiny. 

Then there’s the Department of Government Efficiency (DOGE), a proposed initiative aimed at identifying and eliminating wasteful government spending, streamlining bureaucratic processes, and improving the cost-effectiveness of federal programs. It’s a wildcard for sure, but even if the initiative accomplishes only a fraction of its goal, it will benefit the broader economy. That’s because less government spending may do a good bit of the Federal Reserve’s work in terms of getting the inflation rate down to its preferred target of 2%. 

On the demand side, the Federal Reserve has said it will not cut interest rates as much as it initially projected. However, the trend will still be for at least a handful of rate cuts throughout the year, which should keep consumer spending afloat. 

Where to Invest in 2025

Of course, believing the market will move higher is one thing; making decisions about where to put that money is another. Here are some sectors to consider:

Technology 

Not surprisingly, the tech trade will still be active in the new year. AI will remain a hot theme, and so will semiconductors. Investors may want to pay attention to software stocks as a company’s ability to monetize AI will be a key driver of profitability.

Industrials

Despite efforts to cut government spending, much of the money from the Infrastructure Act is contractually obligated through 2026. That means companies in this sector will continue to be solid investments. 

Energy 

The Trump administration has made U.S. energy independence a priority, and that bodes well for oil and gas stocks.

Utilities 

The demand for data centers and building out an AI infrastructure are just two reasons to believe that electric and natural gas stocks will be among the winners. 

Investors Should Expect Volatility

Markets don’t move in one direction all the time. With many stocks at lofty valuations, a pullback in the first quarter of 2025 is not only likely but would be welcomed by many investors who want to get in on some of their favorite stocks at more appealing prices. 

Apart from valuation concerns, there are other unknowns heading into 2025. For starters, the breadth and impact of the Trump tariff policies are unclear. And while the downside is probably overstated, it’s safe to say that the battle to control inflation is not over. 

The new year also brings geopolitical uncertainty. How the Trump Administration handles the Russia-Ukraine war and how well it quiets tensions in the Middle East and China will be critical to calm the markets. 

With all that said, volatility is normal. Investors should take the advice that time in the market is better than trying to time the market. The trend is for stocks to move higher. Don’t fight the trend.