FX168 Financial News (North America) — On Monday (December 16), top Wall Street analysts believe a set of emerging themes are shaping the outlook for the 2025 stock market. Overall, the market expects the S&P 500 to continue to rise, and the average price target shows room for growth of about 8%.

Although every strategist has different reasons for being optimistic about next year's market, there are some common elements worth watching in their predictions. Here are four major themes that top Wall Street analysts believe will shape the stock market in 2025.

Trump's confrontation with the world

President-elect Donald Trump (Donald Trump) has threatened tariffs on America's enemies and allies since winning the November election.

At the end of November, Trump said that if Canada and Mexico do not curb immigration flows and crack down on drug smuggling, he could impose 25% tariffs on goods imported from both countries. Earlier this month, in an interview with “Meet the Press,” he called tariffs “the most beautiful word” and said that due to the pandemic, he “never really had a chance to fully implement” the tariff policy during his first term.

Although some people think that the tariff threat is mainly a negotiation tool, there are also opinions that Trump's proposal to implement import taxes is serious. If implemented, this policy could trigger a trade war, push up inflation, and eventually cause the stock market to fall.

In its outlook, Ned Davis Research said: “Supply-side disruptions, including tariffs and mass expulsions of immigrants, are downside risks to economic growth, as well as upward risks to inflation.”

BCA Research strategist Peter Berezin (Peter Berezin) further predicted that a full-scale trade war may break out in 2025, which in turn will trigger an economic recession. In his forecast, he recalled from the perspective of January 2026: “In 2025, hopes for a soft landing were not realized, and trade wars and bond market turbulence will push the global economy into recession.”

However, if Trump adopts a moderate trade policy and instead focuses on tax cuts and deregulation, his administration may instead benefit the stock market in 2025.

Trump's game with the Federal Reserve

Trump has reiterated that he will not seek to replace Federal Reserve Chairman Jerome Powell (Jerome Powell) until the end of his 2026 term.

This statement comes against a backdrop where the stock market is close to an all-time high and the Federal Reserve continues to cut interest rates. But if these circumstances change, will Trump maintain this position? Wall Street strategists are on the sidelines.

If Trump's policies (such as tariffs and mass expulsions of immigrants) trigger inflation, the Federal Reserve may change its current interest rate policy and shift to a hawkish position. Currently, the market expects the Fed to cut interest rates only twice next year, by 25 basis points each time. This expectation has declined sharply since Trump was elected in November.

Although Trump has no right to replace Powell before his term ends, he may use him as a “target of criticism” and urge the Federal Reserve to cut interest rates, as he did in 2018.

The market generally hopes that interest rates will continue to fall, and this assumption is a prerequisite for the stock market to rise in 2025. Fundstrat's Tom Lee (Tom Lee) said that next year the stock market will still enjoy the “back-up policy” of the Federal Reserve, that is, to support the market through loose monetary policy.

UBS, DataTrek Research, and Morgan Stanley all cited falling interest rates as the main reason they are optimistic about the 2025 stock market. However, if interest rate expectations change unexpectedly, it could disrupt these predictions and put downward pressure on the stock market.

Artificial Intelligence: Delivering on Expectations

In 2024, the popularity of artificial intelligence (AI) related stocks will continue unabated. Nvidia (Nvidia) rose 170% this year, reaching a new high after tripling in 2023; other AI concept stocks such as Palantir, Vertiv, and Broadcom rose 329%, 159%, and 93%, respectively.

But to maintain this trend, investors need to see that these companies' huge investments in AI infrastructure can translate into substantial revenue and profit growth. If the return on AI investment is not realized, AI chip makers like Nvidia and Broadcom could risk a sharp decline in capital investment.

Baird technology strategist Ted Mortonson (Ted Mortonson) previously told “Business Insider”: “Wall Street's problem now is that they have invested more than 200 billion dollars, and capital expenditure has increased by more than 50%, so where is the return on capital?”

Furthermore, the market expects AI-driven productivity growth to boost the overall economy. Failure to see the expected surge in productivity in 2025 could trigger a volatile shock in the technology sector, which has been the main driving force behind the rise in the stock market over the past two years.

Consumers, the Economy, and Corporate Profits

Over the past two years, the continued strength of the economy and the avoidance of recession have taken the market by surprise. Economists and strategists generally expect the economy to fall into recession in 2023 and 2024, but actual GDP growth is close to 3%, higher than pre-pandemic levels.

If the stock market reaches a new high next year, consumer resilience, continued economic growth, and the steady performance of corporate profits will be the key. In its outlook, UBS stated: “Our forecast for the target of 6,600 points for December 2025 is based on steady economic growth.” This view was shared by almost all strategists.

However, BCA Research is one of the few bearish institutions on Wall Street, believing that Trump's policies could damage consumer balance sheets by triggering trade wars and driving up inflation. The company predicts that the S&P 500 could drop more than 25% to 4,450 points.

The stock market outlook for 2025 will unfold due to a combination of factors. From the uncertainty of Trump's policies to the need to fulfill AI investments, to the resilience of consumers and the economy, the market will face new opportunities and challenges. Although most analysts are optimistic about the future of the S&P 500, the potential risks cannot be ignored.