The S&P 500 may rise by 10% 2025, driven by a strong economy and earnings

The S&P 500 is primed to continue its bull rally in 2025, though at a slightly slower pace, Barclays strategists said in an outlook published this week.

According to Barclays, stocks are expected to keep rallying next year, supported by a resilient economy and strong earnings. The bank forecasts the S&P 500 will increase by 10% to reach 6,600, joining the growing chorus of bullish predictions from leading analysts. This outlook suggests a slight deceleration from the index's impressive 26% gain this year.

Barclays Predicts 10% S&P 500 Rise to 6,600

The strategists, led by Venu Krishna, head of US equity strategy at Barclays, anticipate that the S&P 500 will rise by another 10% to reach 6,600 next year, fueled by strong earnings growth in the tech sector and a resilient economy.

While this forecast indicates a slowdown from the index's impressive 26% gain so far this year, the analysts remain optimistic that the economic environment will continue to support the stock market. In a Monday note, they stated, "Macro slowing to still-healthy levels should support more US equity upside next year, albeit at a deceleration from the breakneck pace of '23-'24. Positioning looks constructive, and policy uncertainty allows for more focused stock and sector selection."

Their confidence largely stems from the robust US economy, which remains strong as consumers—the "central pillar" of both the economy and the stock market—experience income growth and continue to spend. The analysts noted, "The US economy remains resilient due to the intact 'virtuous cycle' of rising aggregate incomes and consumption."

They believe concerns about household financial distress are overstated, as overall delinquency rates remain low and borrowers carry less consumer and revolving credit relative to income compared to pre-pandemic levels.

Furthermore, they see significant earnings growth potential for major tech companies, suggesting Wall Street may be underestimating this by 12%. However, they caution that risks remain due to substantial AI investments by these companies and investors' expectations for quick returns.

Data from Bloomberg reveals that tech giants like Alphabet, Microsoft, Amazon, and Meta have already invested hundreds of billions in AI infrastructure and are set to spend an additional $200 billion next year.

Analysts Warn of Inflation Risks Amid Bullish S&P 500 Forecasts for 2025

The analysts warn that inflation poses a significant risk, particularly if President-elect Donald Trump follows through on his proposals for sweeping tariffs and stricter immigration policies, which could lead to rising prices through 2026. This situation might result in fewer rate cuts from the Federal Reserve than what the markets currently anticipate, creating additional challenges for stocks.

"The risk to equities is not insignificant, especially given that Treasury yields have surged since September and are nearing levels that have historically been unfavorable for equities, especially in the context of fiscal expansion and reduced rate cuts," the analysts stated.

However, they noted that the policy landscape remains uncertain, and markets have generally managed to cope with inflation and interest rates effectively in recent years.

Barclays joins other major banks in projecting continued gains in 2025, maintaining a bullish outlook despite the prevailing policy and geopolitical challenges. RBC analysts forecast the S&P 500 will reach 6,600 points, while Deutsche Bank strategists have set a target of 7,000. Last week, analysts at BMO projected the index would hit 6,700 next year.

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.