Editor’s Note: A few days ago, I was interviewed for a “man in the street” podcast while I was shopping downtown. The question was simple: What changes for me and for the country am I expecting in 2025?

For me, I hope nothing changes. I like my life just the way it is and want it to stay that way. As for the country, I believe we will work our way through whatever challenges present themselves like we always do.

Of course, nothing ever stays the same. But if the stock market can come close to replicating its 2024 performance this year, then that should go a long way towards achieving whatever financial resolutions most investors will make for the year to come!

Not Optimistic Enough

A year ago (“Let’s Do it Again”), I predicted the stock market would turn in another above performance in 2024. I said then, “My guess is the [S&P 500] index will end 2024 somewhere in between those two numbers, ending the year around 5,500. That would equate to a gain of roughly 15% from where the index ended 2023.”

Turns out, my rosy forecast for the past year was not optimistic enough. The index ended 2024 near 5,900 for a gain of roughly 23 percent. Over the past two years the index rose more than 50 percent despite several policy rate hikes by the Fed to curb inflation.

That is good news for index investors who track the S&P 500. Especially after the outbreak of COVID-19 five years ago triggered a 40 percent decline in the index in only a few weeks. Despite that temporary setback, it is up more than 80 percent over the past five years.

Same Dilemma

The stock market’s strong performance during the second half of 2024 leaves me with the same dilemma that I faced a year ago when I asked: “Given the magnitude of the stock market’s recent rally, it is fair to ask if it has gotten ahead of itself. Is there too much optimism priced into stocks, or are they finally back to where they should have been all along?”

A year ago, I framed my response to that question by first multiplying an estimate for full year EPS (earnings per share) for the index and then multiplying that number by the trailing 10-year average PER (price-to-earnings) ratio for the index. That math resulted in a year end value for the index of 5,891, or 24 percent above where it began 2024.

Even though I trusted my math, I was not as confident in the economy at that time. For that reason, I applied a more conservative set of assumptions to arrive at my 5,500 forecast. But by the end of the third quarter, it had already exceeded that mark and was headed towards 6,000.

Major Differences

There are some major differences between where we are now compared to a year ago. The Fed stopped raising its policy rate last summer and made its first rate reduction in September. That was followed by two more cuts in November and December to bring the policy rate down by a full percentage point.

Also, a new presidential administration will be taking over in January. Not only does this represent a change in which political party occupies the White House, but a republican majority in the House and Senate imply that some major legislative changes will soon be in the offing.

I doubt president-elect Trump will get everything on his wish list, but some combination of tax cuts, import tariffs, and financial services deregulation is most likely on the way in 2025. How that affects the stock market remains to be seen, but on the whole Wall Street should like what it sees.

Not So Fast

The same expert (Ed Yardeni) who accurately predicted last year’s earnings for the S&P 500 Index is projecting $285 in total EPS in 2025. Multiplying that figure by the long-term average PER of 20 for the index results in a year-end value of 5,700, which is less than where it ended 2024.

In other words, doing the math that way implies that the index will lose ground during the year to come. The problem isn’t earnings, which Yardeni is projecting to increase by nearly 19 percent in 2025. The issue is the multiple assigned to those earnings, which mostly depend on how optimistic Wall Street is feeling about the economy.

Over the past five years, the forward PER for the index has vacillated between 20 to 30, with an average reading around 25. Applying that multiple to this year’s earnings estimate results in an index value of 7,125, which is about 20 percent above where it ended 2024.

Once again, I feel that the result is overly optimistic, so I am cutting it back. Splitting the difference between the two outcomes results in a year-end value of 6,413 which sounds right to me, even though that equates to less than a 10 percent growth rate over 2024.

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