The stock market has been on a tear in 2024, with the S&P 500 surging by an impressive 26%. But as the year draws to a close, investors are wondering if this momentum can carry over into 2025. Barclays, a prominent multinational investment bank, believes it can. 

In a recent outlook, Barclays strategists have forecasted a 10% rise in the S&P 500, pushing it to 6,600 next year. This optimistic projection is fueled by several factors, including a resilient US economy, robust earnings growth and a constructive market positioning.

A Resilient Economy and Strong Earnings

Barclays’ bullish outlook hinges on the continued strength of the US economy. Consumer spending, the bedrock of the American economy, remains robust, driven by rising incomes and a healthy job market. This “virtuous cycle” of increased earnings and spending is expected to fuel economic growth, thereby supporting corporate profits and stock valuations.

Furthermore, Barclays anticipates strong earnings growth, particularly in the technology sector. They believe that Wall Street’s current estimates for tech earnings may be overly conservative, underestimating the actual growth potential by as much as 12%. This optimism stems from the ongoing advancements in artificial intelligence and the increasing integration of AI technologies across various industries.

The AI Revolution Is a Double-Edged Sword

While AI is poised to drive significant growth in the tech sector, it also presents a potential risk. 

Companies are pouring billions of dollars into AI infrastructure, with tech giants like Alphabet, Microsoft, Amazon, and Meta leading the charge. 

However, the returns on these massive investments may take time to materialize. If investors become impatient and demand quicker results, it could lead to market volatility and downward pressure on stock prices.

Inflation & Policy Uncertainty

Another potential headwind is inflation. Barclays analysts caution that the incoming administration’s proposed policies, including sweeping tariffs and a crackdown on immigration, could exacerbate inflationary pressures. 

This, in turn, could lead to fewer interest rate cuts from the Federal Reserve than the market is currently anticipating, potentially hindering stock market growth.

The analysts acknowledge that “the risk to equities is not insignificant,” especially given the recent rise in Treasury yields, which have historically acted as a headwind for equities at certain levels. 

However, they also note that the policy landscape remains uncertain and that markets have generally navigated inflation and interest rate fluctuations well in recent years.

A Chorus of Bullish Voices

Barclays is not alone in its optimistic outlook for the S&P 500 in 2025. Other major financial institutions, including RBC, Deutsche Bank, and BMO, have also issued bullish predictions, with price targets ranging from 6,600 to 7,000. 

This widespread optimism, despite lingering policy and geopolitical uncertainties, reflects a belief in the underlying strength of the US economy and the potential for continued earnings growth.

While Barclays’ forecast for a 10% rise in the S&P 500 to 6,600 in 2025 appears plausible, investors should remain mindful of the potential risks. The pace of economic growth may moderate, inflation could prove to be more persistent than expected, and policy uncertainty could weigh on market sentiment. 

Either way, 10% is “average” going back to before the Great Depression. That’s not so bad, is it?