We’re witnessing an interesting trend on Wall Street as we head into 2025. Many analysts are leaning into the recent pattern of underestimating the strength of the US economy and predicting a robust year for the stock market. This bullish outlook is driven by expectations of continued economic growth, exceeding current forecasts, and leading to significant gains in the S&P 500.

Over the past few years, the US economy has consistently defied expectations, outperforming projections and surprising Wall Street analysts. This trend marks a shift from the pre-pandemic era, where economic forecasts were often overly optimistic.

Lori Calvasina, Head of US Equity Strategy at RBC Capital Markets, points out this recent history of underestimation. She believes that the current GDP forecasts for 2025 are too conservative and anticipates growth in the 2% to 3% range, rather than the consensus 1% to 2%. This optimistic outlook has led her to set a S&P 500 price target of 6,600 for the year.

Calvasina is not alone in her bullishness. Several prominent Wall Street strategists have issued optimistic predictions for the S&P 500 in 2025, fueled by expectations of a strong economy.

• Wells Fargo’s Christopher Harvey: Issued the most bullish target on Wall Street at 7,007, emphasizing a “cyclical opportunity catalyzed by upward GDP revisions.”
• Bank of America: Forecasts the S&P 500 ending 2025 at 6,666, driven by their economics team’s projection of 2.4% GDP growth, higher than the Bloomberg consensus forecast of 2.1%.

If 2024 was the year of AI, it seems 2025 is shaping up to be the year of GDP. Economic growth is taking center stage as the key driver of market performance.

Bank of America’s Savita Subramanian highlights the connection, favoring “GDP sensitive companies” and recommending overweight positions in sectors like Financials, Consumer Discretionary, Materials, Real Estate, and Utilities. The firm sees particular value in large-cap value stocks with strong ties to the US economy.

This sentiment is echoed by Calvasina, who notes that historically, stronger GDP growth has been conducive to value stock outperformance.

Deutsche Bank’s Bankhim Chadha, another prominent bull with a S&P 500 target of 7,000 for 2025, also emphasizes the importance of a “historically strong economic backdrop.” He draws parallels to periods of robust economic growth in the 1960s and 1990s, which coincided with strong equity market performance.

A closer look at historical data reveals a compelling correlation between GDP growth and stock market performance.

Analyzing data going back to 1947, Calvasina found that:

• When GDP growth ranged between 1.1% and 2%: Stocks were higher only 40% of the time, with an average decline of 3.4%.
• When GDP growth ranged between 2.1% and 3%: Stocks were higher 70% of the time, with an average return of nearly 11%.

This data underscores the importance of economic growth exceeding the 2.1% threshold. A potential slowdown, with growth falling below expectations, could signal trouble for the stock market.

While the stock market and the economy are not always perfectly aligned, historical trends suggest a strong link between robust economic growth and positive stock market returns. As we look ahead to 2025, Wall Street’s bullish outlook hinges on the expectation that the US economy will continue to defy expectations and deliver growth exceeding current forecasts.

We encourage investors to stay informed about economic developments and consider the potential impact of GDP growth on their investment strategies.