We’re at the start of a new year in 2025, and there has been a deluge of forecasts in recent weeks for where the US stock market will end the year.
For me, the most important thing to know about the forecasts is just how often they have been right. Unfortunately, the collective forecasting track record of even the USA’s biggest banks and investment firms have been poor.
Morgan Housel once studied their annual forecasts for the S&P 500 – a widely followed index for the US stock market – from 2000 to 2014. He found that a simple assumption of the S&P 500 going up by 9% a year (the 9% figure was chosen because it represented the index’s long-term annualised return) was more accurate than the forecasts provided by the banks and investment firms; the former was off by an average of 14.1 percentage points per year while the latter was off by 14.7 percentage points per year.
When thinking about the future return of stocks, Housel once wrote that it can be boiled down simply to the “dividend yield + earnings growth +/- change in the earnings multiple (valuations).” I agree, it really is that simple. The dividend yield and earnings growth can be estimated with a reasonable level of accuracy. What’s tricky here is the change in the earnings multiple. Housel explained:
“Earnings multiples reflect people’s feelings about the future. And there’s just no way to know what people are going to think about the future in the future. How could you?”
To compound the problem, over short periods of time, such as a year, it’s the change in the earnings multiple that has an overwhelming impact on how stock prices move. In Housel’s dataset when he was looking at market forecasts, 2002 was a year with one of the largest declines for the S&P 500 – it fell by more than 20%. According to data from economist and Nobel Laureate Robert Shiller, the S&P 500’s earnings actually grew by 12% in 2002. It was the decline in the index’s earnings multiple by 30% from 46 to 33 that led to the sharp drop in its price during the year. The forecasters were predicting that the S&P 500 would increase by a mid-teens percentage in price in 2002, which was close to the index’s earnings growth for the year – I believe what the forecasters failed to anticipate was the sharp drop in the earnings multiple.
If you really need a forecast for where the US stock market will end up in 2025, check out the table below. It shows where the S&P 500 will be given various assumptions for its earnings growth and its earnings multiple. For reference, the index ended the year at a price level of 5,882 with a price-to-earnings (P/E) ratio of 28. If the S&P 500’s earnings fell by 20% in 2025 and the P/E ratio shrank to 5, we’d be looking at a price level of 840 and a disastrous 86% price decline; if earnings growth was 20%, and the P/E ratio expanded to 40, we’d be looking at a price level of 10,083, and a handsome gain of 71%.
The table contains a wide range of outcomes. But it’s possible for the S&P 500’s actual performance in 2025 to exceed the boundaries of the table. It’s hard to say where the limits are when it comes to the feelings of market participants. Nonetheless, of all the forecasts you’ve seen and are going to see about the US stock market for 2025, I’m confident the table in this article will be the most honest forecast you can find.
Disclaimer: The Good Investors is the personal investing blog of two simple guys who are passionate about educating Singaporeans about stock market investing. By using this Site, you specifically agree that none of the information provided constitutes financial, investment, or other professional advice. It is only intended to provide education. Speak with a professional before making important decisions about your money, your professional life, or even your personal life. I currently have no vested interest in any companies mentioned. Holdings are subject to change at any time.