The US stock market is on a roll. The S&P 500 index closed 2024 up 23 per cent, marking its second consecutive annual gain above 20 per cent. This year, the average forecast on Wall Street is for around a further 10 per cent rise. Households are bullish too: the share of Americans expecting equity prices to rise is at its highest in decades.
The exuberance is jarring for two reasons. First, a majority of economists expect president-elect Donald Trump’s “Maganomics” agenda to have a negative impact on America’s economic growth, according to the Financial Times’ annual poll. Second, US asset valuations are already pretty lofty. Excluding the peak of the dotcom bubble, cyclically adjusted price-to-earnings ratios for stocks are near their most expensive in over a century. Optimism over artificial intelligence is largely behind the surge. So can US equities really sustain their bull run in 2025?
It is possible. For starters, though economic growth and stock market performance are related, they do not always neatly align. Vibes matter. American equities jumped following the November election. That partly reflects a belief that a business-friendly Trump administration would not put the market rally at risk. Next, even if economic activity weakens this year, investors still want exposure to AI, given faith in its transformative potential. If both the Trump and tech optimism pan out, then stocks could keep rising.