3 Forces Shaping a Bullish 2025 Outlook

Key Points

• Economic data, consumer spending, and an outlook for sustained economic growth in 2025 are reasons to be bullish on stocks.
• The rally will broaden as headwinds ease and deregulation enters the picture. 
• The S&P 500 is at a critical juncture and could rise another 1,300 points over the next 12 months. 

There are three reasons to be bullish about 2025. The long and short of it is that economic data remains solid, if a little spotty; consumers remain resilient, and there is broad-based demand globally. What this means for investors is that sector rotation is still a factor influencing market activity today, so volatility may remain high. Still, the rally in stocks will continue to diversify away from tech into a wider range of stocks and sustain the uptrend in the S&P 500 NYSEARCA: SPY next year. 

1) The Economy Is Solid, Underpinned by Healthy Labor Markets

The United States economy started the year slowly, growing only 1.3% in Q1, but growth accelerated sharply in Q2 to 3% and sustained a high 2.0% pace in Q3, and the forecast for Q4 is the same. Q4 GDP should come in at around 2.5% according to the GDPNow Tool and may exceed that forecast because of the upward trend in the estimate: goods and services, consumer spending, and business investment drive growth. The latest read on the consumer is that spending remains solid and is improving, with retail sales up 2.8% year-over-year in October and outpacing inflation. 

Labor markets underpin economic strength. The labor market has cooled significantly from its peaks but remains solid compared to historical norms. The latest reads show job creation, job openings, initial jobless claims, and total jobless claims all trending in alignment with late 2019 and early 2020 data, which was good. The U.S. economy was accelerating then, pushing the S&P 500 to new all-time highs. The worst bad news is the index of leading indicators, which has been negative for over two years. The index reading is a red flag but mitigated by cooling labor data and other post-COVID normalizations skewing the readings. 

2) Consumer Strength Is Broad-Based Across All Categories Except Big-Ticket Items

The Q3 earnings reports from retailers were generally good. Not all were great, and some contracted compared to last year, but growth and outperformance are the trends. Reports from Walmart NYSE: WMT, TJX Companies NYSE: TJX, and Williams-Sonoma NYSE: WSM align with this assessment, providing a broad-based view of consumer trends. Each outperformed and cited strength in all categories. 

The guidance for Q4 is also good and suggests these trends will continue. The NRF is forecasting 2.5% to 3.5% growth during the holiday season, down from last year and impacted by a shortened season, but it is very cautious given the trends.  Walmart, for one, is forecasting its Q4 to be at least 100 basis points better and will likely outperform its guidance. 

Delta Airlines NYSE: DAL serves as a bellwether of the global economy because its operations serve business and consumer needs domestically and abroad. The trends in 2024 are positive, with international demand inflicting positive, sustained system-wide growth and positive guidance. The guidance for Q4 2024 and F2025 is for the growth to continue with a 3-4% capacity increase, driving a mid-single-digit topline gain next year. Fuel costs, another indicator for the global economy and the S&P 500, are expected to rise slower than revenue, providing wider business margins. Wider margins and improved profitability are positive catalysts for stocks. 

3) The S&P 500 Is at a Critical Juncture 

The S&P 500 is trending higher and at a critical juncture. The move to new highs in January indicated a 6,100 price target, where the market is today. This level may provide a top for the market, but it may not last long if it does. The bullish indications include candlestick action, MACD, and stochastic, which suggest that a new high will be set soon. A move to a new high will put the S&P in uncharted territory with nowhere to go but up. In that scenario, it could sustain a rally through the end of 2025 and gain another 1,300 points along the way.