Stock market forecast: What Trump's return means for markets?

Here's the stock market forecast for 2025, and how the election of Donald Trump will figure into the Dow Jones, S&P 500 and Nasdaq indexes.

On November 6, the day following Trump's reelection as president, the three major stock indexes surged, nearing record highs. The Dow Jones Industrial Average and the Nasdaq both recorded their fourth-largest daily point gains in history, while the S&P 500 achieved its sixth-highest point increase.

Trump's victory provided a boost to stocks that surpassed any seen in previous elections. The market's enthusiasm following his win was greater than the rejoicing seen after Ronald Reagan's 1980 victory. However, the question remains: can investors expect this post-election momentum to carry into 2025, or was this initial excitement merely a case of irrational exuberance?

Wall Street's Optimism on the stock market

Despite some market jitters from recent trading sessions, Wall Street generally remains optimistic about the stock market's prospects for the coming year. Nevertheless, there are potential obstacles—some possibly created by Trump himself—that could hinder a rally in 2025.
"Trump's pro-business stance could reignite investor confidence and boost capital spending, mergers and acquisitions, and other investment activities," noted Jeffrey Schulze, head of economic and market strategy at ClearBridge Investments.
However, Schulze cautioned, "Not all aspects of Trump's agenda are favorable for the market. Challenges may arise from increased tariffs, reduced immigration, and the potential for higher long-term interest rates."

2025 Stock Market Forecast: A Broad-Based Rally?

Many experts believe that if conditions align favorably, stocks could experience not just a rally but broad-based growth across various sectors within the Dow Jones, S&P 500, and Nasdaq indexes. However, recent market trends have raised concerns, as some sectors are beginning to decline.

During a recent conference call, Maxwell Grinacoff, head of U.S. equity derivatives strategy at UBS Investment Bank, observed that the day after the election signaled a boost to momentum trading. Historically, elections often lead to significant market rotations, but this time, momentum continued to rally sharply.

Sameer Samana, a global market strategist at Wells Fargo Investment Institute, emphasized that earnings will primarily guide stock movements. He also noted that fears of a hard economic landing in 2024 turned out to be unfounded, as the economy experienced a soft landing instead.

Stock Market Volatility and Predictions

Opinions vary on which sectors will thrive. Janus Henderson predicts health care, materials, industrials, and energy will lead profit gains in 2025, while communication services, consumer discretionary, utilities, and financial stocks may lag.
Health care, particularly biotech, could offer significant returns, especially with the Federal Reserve starting to cut interest rates. Janus notes that biotech has historically outperformed the S&P 500 in the year following the first Fed rate cut.

The post-election rally faced challenges on December 18 when the Federal Reserve scaled back its 2025 interest-rate cut forecast, unsettling Wall Street. The Cboe Market Volatility Index (VIX) spiked, signaling significant market anxiety.
While the market rebounded on December 20 following easing inflation data, the recovery was short-lived. By the year-end, some analysts advised investors to reduce stock exposure, leading to a cautious sentiment as key indexes closed below their moving averages.

What History Says About Stock Market Forecast For 2025

Looking back at Trump's initial term, the stock market reacted positively to his election in 2016, but the gains were less pronounced than in 2024. While the Dow, S&P 500, and Nasdaq all rose on the day after the 2016 election, this year's increases were significantly larger.

However, the initial month following the election showed differing performance between the two years, with 2024's results not quite matching those from 2016 for the Dow, while the Nasdaq outperformed.

If the markets follow the trajectory of the 2016 cycle, investors could be in for an impressive year in 2025. By the end of 2017, the Dow Jones index had soared by 34.8%, the S&P 500 rose by 25%, and the Nasdaq jumped by 32.9%.

However, it’s worth noting that the post-election performance was even stronger after Joe Biden's victory in 2020. In the first month, the indexes increased between 8.8% for the S&P and 10.9% for the Nasdaq. Over the first year, stock market gains ranged from 28.3% for the Dow to 35.8% for the S&P.

Historical Context of Election Impact

Market gains following elections haven’t always been guaranteed. After the elections of Bill Clinton in 1992, George W. Bush in 2000, and Barack Obama in 2008, indexes generally fell on the first day. The Nasdaq was the only exception, posting a slight gain after Clinton's election. In the first year of their presidencies, the S&P's returns fluctuated dramatically, ranging from -14% to 19%.

The Federal Reserve's Role in 2025 Stock Market Predictions

This brings up the question of how much influence presidents and government regulators actually have on the markets. One area where the Federal Reserve has significant sway is interest rates, and many analysts expect limited action from the Fed in 2025.

Following the December Fed meeting, analysts believe the Fed might only cut rates once next year, or possibly not at all. Some experts suggest that a robust economy could lead to rising inflation, but that may not necessarily impact the market negatively.

Brian Rehling, Wells Fargo's head of global fixed-income strategy, noted in a recent call that the economy's progress should offset any inflation concerns, indicating that there won't be a strong demand for lower interest rates.

S&P Global Ratings Chief Economist Paul Gruenwald expressed that the U.S. economy is currently in a solid position. While many market experts think a soft landing has already occurred, he believes it is still forthcoming, predicting U.S. GDP will slow to 2% next year from 2.7% this year, potentially remaining at or below the 2% mark into 2026 and 2027.

When considering shares, indices, forex (foreign exchange) and commodities for trading and price predictions, remember that trading CFDs involves a significant degree of risk and could result in capital loss.

Past performance is not indicative of any future results. This information is provided for informative purposes only and should not be construed to be investment advice.