Between tech-fueled sell-offs, interest rate cuts and a presidential election, 2024 had its fair share of volatile market moments. But ultimately, the major indices ended the year significantly higher while setting dozens of all-time highs. The S&P 500 gained 23.31%, the Nasdaq Composite gained 28.64% and the Dow Jones Industrial Average gained 12.88%.

As we move into 2025, sticky inflation, a new administration and uncertainty about everything from potential tariffs to interest rates present a lot of unanswered questions. Money asked investment professionals for their insights about the new year. Here are their stock market predictions for 2025.

Lower earnings and higher interest rates could hurt returns

With the exception of 2022’s bear market, when the S&P 500 fell by nearly 20%, the past four years have produced strong returns for investors. The benchmark index saw gains of 26.89% in 2021, 24.23% in 2023 and 23.31% in 2024.

As rewarding as those gains have been, investors should prepare for tempered returns in 2025, according to Timothy Chubb, executive vice president and chief investment officer of Girard Investment Services. “I do think that earnings growth will narrow between the Magnificent Seven and the other 493 companies [in the S&P 500],” Chubb says. “We could see companies’ top lines slowing down a bit if the economy [slows], and bottom lines being challenged by higher-for-longer interest rates.”

With inflation falling from a 41-year high of 9.1% in 2022 to its current 2.7%, the Federal Reserve was able to cut its benchmark federal funds rate by a total of one percentage point in 2024. But getting inflation back down to the Fed’s 2% target remains a challenge, leading to speculation that the central bank may slow down or pause its rate cuts. The CME Group’s FedWatch Tool, which gauges the probability of upcoming rate cuts, currently shows a 88.8% chance that the Fed’s rate-setting committee will hold rates steady in the 425–450 basis point range at its January meeting.

Howard Chan, chief investment officer of Kurv Investment Management, says the persistence of elevated inflation means that investors will have less certainty about what will happen with interest rates in 2025. “There was a sense that the Fed had at least contained inflation and things were going in the right direction. I’m not sure the battle has been completely won,” he says.

Slowing or pausing rate cuts could adversely affect interest rate-sensitive sectors, such as financials, technology and real estate, the latter of which is still struggling after the Fed hiked interest rates to their highest levels since the 2007–2008 financial crisis.

Additionally, a number of President-elect Trump’s proposed policies could push inflation higher again. “Many of those policies — from tariffs [to] more stringent approaches to immigration that would restrict the workforce — would be inflationary,” Chan says.

Big investment banks also think the market will grow at a slower pace this year than in 2024. JPMorgan set its 2025 price target for the S&P 500 at 6,500, representing a roughly 9% gain from current levels, a bit lower than the index’s historical return of roughly 10% over the past 30 years. Meanwhile, Goldman Sachs‘ prediction is for the S&P 500 to match its 10% annual return.

The market’s price-to-earnings (P/E) ratio serves as a further rationale for these tempered expectations. A P/E ratio is a financial metric that can help investors determine if a stock is undervalued or overvalued. Historically, the median P/E for the S&P 500 is 17.92, but it is currently a considerably-higher 28.92, which Chubb calls an “expensive” market.

When asked if “expensive” implies “overvalued,” Chubb suggests that while it’s certainly nottime to cash out, it could be a good time to take profits. He adds that while the benchmark indices may be overpriced, “there’s a lot of opportunities under the surface to outperform the market.”

Broadly, however, investors shouldn’t expect the same robust growth they have seen the past two years, especially in some of the sectors that led the market higher in 2024. One of those sectors is tech, which boomed in 2024. “We’re likely to see a correction in tech,” Chan says. “It’s not a matter of if but when.”

Value stocks may outperform

Whereas growth stocks — specifically in the tech sector — have propelled the market recently, value stocks could shine in 2025. Value stocks, which refer to companies currently trading below what analysts think they’re worth based on their earnings, can potentially provide healthy returns between share appreciation and dividend payments.

These companies are often older, well-established and pay dividends. They typically fall into sectors like utilities, consumer staples and health care. The latter of those is one sector Chubb is eyeing in 2025.

“Health care has had really significant headwinds the past few years that led to earnings declines year-over-year. It’s gotten through that difficult period, and I think we’ll likely see earnings growth reaccelerate,” Chubb says. But he cautions that the broad sector could remain vulnerable.

Instead, he is looking at a specific corner of the health care sector. “It’s on the tools and diagnostics side of things where I think there’s some opportunity. We’re starting to see some green shoots,” he says. Chubb mentions that companies could benefit from a resurgence of mergers and acquisitions as patents begin to expire. When pharmaceutical companies face patent expiration, for example, they often lose revenue when competitors enter the marketplace with similar or generic products. Oftentimes, companies losing patent protection will acquire or merge with other companies in order to bolster their valuations.

Consumer staples, a sector that includes manufacturers and retailers of everyday products like groceries, could be a good place for investors to be if Trump makes good on his threats to impose hefty tariffs. Consumer staples can perform better in inflationary environments because those companies can raise prices enough to cover their costs as well as pad their profit margins. Such has been the case for some grocery chains that increased prices beyond inflation in recent years.

Chubb points out that when prices rise, consumers tend to delay purchases. “You can’t do that with consumer staples,” he says. “So there’s more implied safety [in those stocks].”

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New administration could boost financials, hurt energy

Financials is one sector likely to profit under the next administration. Trump has proposed lowering the corporate tax rate to 15% from its current level of 21%, something that could materialize with Republican control of both chambers of Congress. More broadly, Trump’s stated goals of lowering taxes, regulations and interest rates would have outsized impacts on companies operating in the financial services space.

While the Fed — not the president — controls interest rates, Trump could curtail the powers of financial regulators, similar to how he rolled back portions of the Obama-era Dodd-Frank Wall Street Reform and Consumer Protection Act in his first term.

The energy sector — and fossil fuel companies in particular — could suffer at the hands of Republican policies. Trump has stated a desire to “unleash” American energy production, although it’s not clear that oil companies have much extra production capacity. As it is, the energy sector has been a victim of its own success. It meager 1.09% gain in 2024 was second-worst only to industrials, even as U.S. oil and gas production hit record highs.

Whether or not the incoming president is able to persuade energy companies to find a way to increase output, analysts are already predicting an oil glut, according to reports by ING and JPMorgan Research. If global demand weakens, as some analysts worry it might as a result of China’s continuing economic malaise, oil companies could lose even more money as surplus fuel piles up. While Americans might appreciate cheaper gas, an imbalance between supply and demand could further shrink energy companies’ profit margins.

AI will continue to dominate

Artificial intelligence grabbed headlines the past two years, with chipmakers like Nvidia leading the market higher. But companies are just starting to realize how broadly AI can be used. As it becomes more ubiquitous, that progression will impact businesses outside of semiconductor manufacturers and Big Tech.

“The AI revolution is in the first or second inning,” Chan says. “A lot of the products are in the B2B space. We’re just beginning to see applications in the B2C space.” Chan sees those business-to-consumer applications taking shape in numerous industries, well beyond tech. For instance, Chan points out that companies in the media space, such as Netflix and Disney, are implementing AI to personalize recommendations, generate subtitles and increase ad revenue.

“What we know as tech is really diffused everywhere,” he says. Over the past few years, companies have focused on investing in AI infrastructure layers, like chip production and data storage facilities. But according to Chan, if businesses outside of tech are able to monetize AI software models, that could positively impact stocks’ performances in 2025.

AI’s expansion is also likely to continue improving companies’ bottom lines by impacting labor force productivity — a theme Chubb noticed in earnings calls throughout 2024. “It can really be an opportunity for a lot of these names to cut costs,” he says. “Amazon referenced that around 25% of code is now developed using AI,” he says. “[AI] adds to operating leverage and could be a tailwind for profits.”

In 2011, venture capitalist Marc Andreessen correctly predicted that the economy would increasingly revolve around software in a now-famous essay titled “Why Software Is Eating the World.”

According to Chubb, we’re watching the next stage of this economic evolution play out in real time with AI. “The argument we’ve made for a number of years now is that AI will eat software,” he says.

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