Why the Stock Market Could Gain Another 20% in 2025

As we approach the midpoint of the decade, investors are wondering what the stock market has in store for the remainder of the 2020s. While some may be drawn to the allure of high-risk, high-reward investments, I, as an experienced investment consultant, believe that the key to long-term success lies in stable, predictable growth. In this article, I will explore why the stock market could gain another 20% in 2025, focusing on the fundamentals that drive consistent performance.

One of the most compelling reasons for optimism in the stock market is the continued strength of the U.S. economy. Despite the challenges posed by the COVID-19 pandemic and geopolitical tensions, the U.S. has maintained a robust economic recovery. According to Vanguard's 2025 economic outlook, the U.S. economy is expected to grow at a rate of 2.1%, with unemployment at 2.7% and core inflation at 4.5% (Figure 1). This growth is driven by supply-side factors such as labor productivity and available labor, which have propelled the U.S. economy despite restrictive monetary policy.

Another factor contributing to the potential 20% gain in the stock market is the global economic outlook. As outlined by Vanguard and Goldman Sachs, the global economy is expected to continue its recovery, with worldwide GDP growth projected at 2.7% (Goldman Sachs). This growth, driven by supply-side factors like productivity gains and labor availability, will likely boost corporate earnings. Vanguard forecasts U.S. GDP growth of 2.1%, while Goldman Sachs expects 2.5%, both indicating a robust economy. This growth, coupled with easing inflation, should translate into higher earnings for corporations, potentially driving the stock market to gain another 20% in 2025.

The projected interest rate cuts by central banks, as mentioned in the Vanguard and JPMorgan reports, also play a crucial role in the potential 20% gain in the stock market. Lower interest rates lower borrowing costs for companies, boosting their earnings and cash flows. This increases the present value of future earnings, leading to higher stock valuations. Lower interest rates also make bonds less attractive, driving investors towards equities. With the S&P 500 currently trading at a forward P/E of around 18, a 20% gain would bring it to 21.6, still below the historical average of 25. Thus, there's room for growth, supported by projected earnings growth and lower interest rates.

In conclusion, the stock market could gain another 20% in 2025, driven by the continued strength of the U.S. economy, a robust global economic outlook, and projected interest rate cuts by central banks. While some investors may be drawn to the excitement of high-risk investments, I believe that the key to long-term success lies in stable, predictable growth. By focusing on the fundamentals that drive consistent performance, investors can position themselves for a prosperous 2025 and beyond.