What’s Next for the S&P 500: More Upside Ahead?

The US market has delivered exceptional returns over the past two years.

The S&P 500 ended 2024 with a 23.3% gain, following a 24.2% increase in 2023. 

This marks its strongest two-year performance of the century, according to estimates by the Financial Times.

The S&P 500’s stellar run has sparked questions in the Beansprout community about whether more upside lies ahead.

With President-elect Donald Trump’s inauguration just around the corner, investors are also weighing potential risks his policies may pose to the market.

In this post, we explore the factors driving the strength of the US market and consider whether US stocks remain a worthwhile investment.

Recap of performance in 2024

As a benchmark index representing 500 leading companies and roughly 80% of available market capitalisation, the S&P 500’s performance in 2024 stands out against global counterparts.

US markets have significantly outpaced major indices in Europe and Asia. While the Stoxx 600 and FTSE 100 rose by 6% and 5.7% respectively, and an MSCI Asia-Pacific index gained 7.6%, the S&P 500 surged by 23.3%.

The rally in US markets was fueled by the Federal Reserve’s decision to reduce interest rates starting in September 2024, marking the first cuts since the pandemic. 

Resilient economic data has also bolstered investor confidence, signaling a potential soft landing for the US economy.

Further optimism stems from expectations of tax cuts and relaxed regulations under Donald Trump’s second presidential term, contributing to recent gains in the US market.

Performance S&P 500 by sector in 2024 

The “Magnificent Seven” megacap tech stocks— Apple, Amazon, Alphabet, Microsoft, Meta, Nvidia and Tesla were once again key drivers of the S&P 500 performance in 2024. 

Unsurprisingly, the communications-services sector was the best performer of 2023, ahead of information technology, as Artificial Intelligence (AI) and Big Tech’s earnings growth has led to rising investor optimism on AI’s future potential. 

The communications services sector includes Meta Platforms (META) and Alphabet Inc (GOOG), while information technology includes Apple (AAPL), Microsoft (MSFT) and Nvidia (NVDA). 

Rounding up the top three sector was the Consumer Discretionary sector, which includes the likes of Amazon (AMZN) and Tesla (TSLA). 

Top 20 best performing stocks in the S&P 500 in 2024 

The standout performer for 2024 was Palantir Technologies, with a 340.5% increase, even on top of a 167% increase in 2023. 

That said, among the S&P 500, 66% of stocks showed gains for the year, with 67 stocks showing price increases of 40% or more.

Wall Street expectations for S&P 500 in 2025

Going into 2025, Wall Street strategists have broadly been optimistic about the prospects of returns for the S&P 500, with the 2025 year-end forecasts for the index ranging from 6,400 to 7,100. 

Given the S&P 500 closed at 5,882 on 31 December 2024, this implies a potential return of 9-21% for the full year in 2025. 

Several factors that contributed to market optimism in 2024 are anticipated to continue driving the strong performance of the US markets, such as a supportive Federal Reserve and a stable domestic economy, with lower interest rates, higher labour market productivity and a more favourable environment for corporates in the US. 

Healthy earnings growth expected 

Based on LSEG data, collective S&P 500 earnings are forecast to rise to $275 a share next year, a 14.2% advance, with tech and financial stocks leading the near-term gains. 

While current valuations may be elevated, continued earnings growth could underpin much of the index returns in 2025, given a broader earnings recovery in the year. 

Broadening of the market 

Much of the valuation re-rating and returns for the S&P 500 has been led by the “Magnificent Seven” stocks, which have represented between 55-63% of S&P 500 returns in the last three years. 

However, Goldman Sachs analysts, led by David Kostin, project that 2025 will see the smallest relative outperformance of these seven largest U.S. companies since 2017, marking a reversal from their trend of prolonged market-beating gains. 

Earnings growth for the S&P 500 excluding the “Magnificent Seven” has been showing sequential improvement, and earnings growth rates are projected to accelerate as 2025 progresses. 

The sustainability of the S&P 500 returns would thus be significantly influenced by the earnings growth trajectory of the broader US market in 2025. 

Macroeconomic tailwinds 

The most bullish estimate currently, by John Stoltzfus, chief investment strategist at Oppenheimer, has the S&P 500 reach 7,100, a 21% upside and a repeat of above 20% price returns for the third consecutive year running. 

This would also imply a 25.8x multiple over their S&P 500 earnings forecast of $275, in line with consensus earnings expectations. 

John Stoltzfus pointed to strong economic, business, consumer, and job growth data since the Fed's rate hike cycle began in March 2022 as supporting the current bull market. 

He further highlighted artificial intelligence as a significant technological and economic milestone, comparing its potential growth impact to that of automobiles in the 1920s.

Risks to watch 

The market is not without risks of course. As highlighted by Head of US equity strategy Venu Krishna at Barclays, while the bullish outlook rests heavily on the robust US economy, hefty AI investments and investor impatience for returns could pose risks for Big Tech. 

Inflation could be a concern if President-elect Trump enacts tariffs and immigration crackdowns, raising prices through 2026. This may limit the Federal Reserve's ability to lower rates, potentially affecting the stock market.

Moreover, rising Treasury yields, which are already near levels that typically pressure stocks, could pose issues if fiscal expansion occurs with fewer rate cuts.

As echoed by Deutsche Bank chief global strategist Binky Chadha, “The biggest risks lie in aggressive trade and immigration policies, which could hurt growth and drive up inflation,” he cautioned. “This might force the Fed to halt rate cuts or even consider raising rates, pressuring bond yields and equities.”

P/E valuation of S&P 500 above average

Based on JP Morgan Asset Management estimates, as at 31 December 2024, the S&P 500 is trading at a Forward P/E of 21.5x, 1.4 standard deviations above the last 30 year average of 16.9x. 

Across most other valuation measures, such as the price-to-book ratio, valuations for the S&P 500 are now well above historical averages. 

Historically, higher S&P 500 valuations, as assessed by the forward P/E ratio has implied lower potential returns on a 1-year and 5-year basis. 

What would Beansprout do?

Despite the strong performance of the S&P 500 over the past two years, Wall Street strategists remain optimistic, with year-end forecasts for 2025 ranging from 6,400 to 7,100. 

This implies a potential upside of 9-21% for the year.

The positive sentiment is driven by expectations of robust economic growth, positive earnings momentum, and a rally that extends beyond the "Magnificent 7" tech stocks.

However,, we would be mindful that higher S&P 500 valuations have historically implied lower potential returns on a 1-year and 5-year basis. 

It’s also important to stay mindful of potential risks, including policies under President-elect Trump and the impact of elevated bond yields.

For those looking to gain exposure to the US market, a low-cost ETF tracking the S&P 500 could be a simple and effective option.

If you prefer a hands-on approach to building your US stock portfolio, discover how fractional trading lets you own shares of top companies starting from just US$5.

To start investing in the S&P 500, it’s essential to choose a low-cost brokerage account with access to the US market. Discover which brokerage provides the most affordable option for US market access here.

Apart from the US market, find out what are some of the other investment opportunities to look out for in 2025. 

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