As the new year begins, investors have much to appreciate. In 2024, the renowned Dow Jones Industrial Average (DJINDICES: ^DJI), the S&P 500 (SNPINDEX: ^GSPC), and the tech-heavy Nasdaq Composite (NASDAQINDEX: ^IXIC) all reached several all-time highs.

Unordered, the ongoing bull market has seen benefits from:

• Artificial Intelligence (AI)
• Better-than-expected corporate earnings
• Sustained economic growth in the U.S.
• The reelection of Donald Trump
• Enthusiasm around stock splits

However, in the financial district, the focus is typically on future movements rather than historical performance.

No tool or data can perfectly predict stock market movements in the short term, but historical events and indicators often correlate with significant changes in stocks and major indexes.

Here are ten predictions concerning the stock market for 2025, including broad economic forecasts and more specific company outlooks.

1. Expect a 20% Market Decline

While the stock market generally trends upwards over time, there’s a strong likelihood the Dow Jones, S&P 500, and Nasdaq Composite will see a correction of at least 20% from their recent record highs.

As Donald Trump assumes office again in just a couple of weeks, he will step into a highly valued stock market. The S&P 500’s Shiller price-to-earnings (P/E) Ratio, also known as the cyclically adjusted P/E Ratio (CAPE Ratio), stood at 37.94 by December 27, very close to its high from 2024 and marking the third-highest level during the past 154-year bull market.

S&P 500 Shiller CAPE Ratio data provided by YCharts.

In the history since January 1871, there have only been six instances when the S&P 500’s Shiller P/E has exceeded 30 during a bull market, including the current scenario. Each time afterward, the S&P 500, Dow Jones, or Nasdaq Composite has lost 20% or more.

Although the Shiller P/E isn’t used for timing, it has historically hinted at potential market declines.

2. A Resurgence of the Crypto Bear Market

It’s not just stocks facing potential downfall in 2025. The recent explosive growth in cryptocurrencies is likely to pause sharply.

The surge in crypto values can largely be attributed to MicroStrategy’s (NASDAQ: MSTR) strategy of leveraging to buy Bitcoin (CRYPTO: BTC). CEO Michael Saylor is currently looking for permission to boost his company’s share count by 10 billion, which will be utilized to issue new shares and purchase more Bitcoin.

While some interpret MicroStrategy’s strategy as an “infinite money glitch” that continues to raise Bitcoin’s value, history has shown that similar tactics can lead to disappointment. MicroStrategy’s unsustainable 2024 price rise may ultimately lead to a downturn in 2025 for cryptocurrencies.

3. Declining AI Hype

The most notable trend in Wall Street over the previous two years has been the rise of AI, with Nvidia (NASDAQ: NVDA) being one of the biggest beneficiaries. Nvidia’s graphics processing units (GPUs) are essential for AI-optimized data centers.

However, historical trends suggest that transformative innovations often face setbacks early in their development. In the past thirty years, every significant technological shift, including the internet’s introduction, has experienced an early-stage bubble burst. The lack of a clear strategy for most businesses in their AI investments suggests that investors may be overestimating how quickly this technology will be adopted and its effectiveness.

Furthermore, Nvidia’s recent declining gross margins indicate increasing competition and a reduction in the scarcity of AI GPUs, signifying that AI’s hype may diminish in the upcoming year.

4. Healthcare Sector Will Shine

Except for materials, healthcare has had a dismal performance in 2024, showing only a 0.6% increase as of December 27. While uncertainties remain regarding how the Trump administration will handle pharmaceutical pricing and healthcare marketing, the potential rewards for investing in healthcare stocks now appear better compared to the risks.

This significant gap in the forward P/E ratios between the S&P 500 and S&P 500 healthcare stocks — 22.3 for the S&P 500 compared to 16.9 for healthcare stocks — reminds us of similar circumstances right after the COVID-19 market crash. Though healthcare stocks did not deliver outstanding returns in 2022,

During the recent bear market, certain sectors greatly outperformed the overall market. This trend may repeat itself in 2025.

Additionally, many top healthcare stocks are trading at historically low prices compared to the expensive market. Major players like Pfizer (NYSE: PFE) and Johnson & Johnson (NYSE: JNJ) are currently valued close to their lowest in a decade in terms of forward P/E ratios but offer the highest dividend yields seen in a decade.

5. Challenges Ahead for Consumer Cyclical Stocks

While the tech sector is often viewed as vulnerable, consumer cyclical stocks might face even greater challenges in 2025. In 2024, aside from technology and communication services, consumer cyclical was the third-best performing sector, posting nearly a 28% increase.

The primary concern for consumer cyclical stocks is the ongoing inflation rate. The aggressive rate hikes by the Federal Reserve, from March 2022 to July 2023, successfully reduced inflation from a high of 9.1% to under 3%. However, the Consumer Price Index for All Urban Consumers (CPI-U) has been on the rise again recently, with consistently high shelter inflation remaining a critical issue.

In addition to inflation concerns, the expected slow growth in the U.S. economy in 2025 raises questions about the valuation of consumer cyclical stocks. Tesla’s high forward P/E ratio of 129 and Chipotle Mexican Grill’s ratio of 46 seem unsustainable.

6. S&P 493 Will Outperform the “Magnificent Seven”

For the past two years, Wall Street’s bull market has largely been powered by the “Magnificent Seven,” which includes the seven most influential companies in the market: Apple (NASDAQ: AAPL), Nvidia, Microsoft (NASDAQ: MSFT), Alphabet, Amazon, Meta Platforms (NASDAQ: META), and Tesla.

As of now, the SPDR S&P 500 ETF Trust has increased by over 25% in 2024, while the Invesco S&P 500 Equal Weight ETF has only risen by less than 12%. This illustrates the significant weight these seven companies have had in driving the market in 2024.

While some members of this group, like Meta and Alphabet, still present attractive fundamentals, others have questionable valuations. For instance, despite a slowdown in growth, Apple’s P/E ratio has doubled in the last two years. Nvidia’s trailing-12-month price-to-sales (P/S) ratio also appears to be consistent with historically overvalued market leaders.

In summary, it seems likely that the “Magnificent Seven” will lag behind the other 493 stocks in the S&P 500 in the upcoming year.

7. Record Stock Buybacks in the S&P 500

The enactment of Donald Trump’s Tax Cuts and Jobs Act (TCJA) brought the corporate income tax rate down from 35% to 21%, the lowest it has been since 1939. Following the TCJA, major U.S. corporations significantly increased their stock buyback activities. Currently, S&P 500 companies are repurchasing an average of $200 billion to $250 billion worth of shares quarterly, compared to $100 billion to $150 billion per quarter from 2011 to 2017.

With the possibility of Trump returning to office and hints at further cuts to corporate income tax rates, businesses may feel encouraged to ramp up share repurchases to return value to their shareholders.

In fact, the record for S&P 500 share buybacks over a 12-month period is $1.005 trillion, achieved in the quarter ending June 2022. In 2025, it’s very likely that S&P 500 companies will surpass $1 trillion in total buybacks, positively affecting their earnings per share.

8. Continued Stock-Split Enthusiasm

Investor enthusiasm surrounding stock splits is expected to be a significant driver for certain stocks in the upcoming year. A stock split enables a publicly traded company to adjust its share price without affecting its overall market capitalization or operational performance.

According to a study by Bank of America Global Research, companies that implement forward stock splits have consistently outperformed the S&P 500 in the year following their split announcements. These split companies tend to innovate and outperform their competitors more effectively.

In 2025, Meta Platforms is poised to make history by conducting its first-ever stock split. Similarly, Costco Wholesale (NASDAQ: COST) is approaching the $1,000-per-share mark and has not split its stock since January 2000. Announcements of splits from either or both of these companies would create significant buzz on Wall Street this year.

9. Anticipated Re-scheduling of Cannabis

Let’s be frank: Cannabis stocks have been disappointing for several years. The incoming President Trump has not shown support for legalizing recreational marijuana, and Florida, a key market for these stocks, rejected a recreational marijuana proposal in the November election.

Despite these setbacks, an important change for cannabis stocks is expected in early 2025. The U.S. Drug Enforcement Administration (DEA) is anticipated to move cannabis from Schedule I to Schedule III under the Controlled Substances Act. While marijuana will remain illegal on a federal level, this reclassification will exempt cannabis companies from certain tax limitations imposed by Section 280E of the U.S. tax code.

In simpler terms, businesses selling Schedule I or II substances can’t take standard tax deductions, apart from their cost of goods sold. However, companies dealing with Schedule III substances can actually take normal tax deductions.

The recent change to classify certain substances under Schedule III will significantly reduce tax expenses for cannabis companies, potentially leading to a boost in this struggling sector.

10. Microsoft is set to conclude the year as the most valuable company on Wall Street

Lastly, the dynamics of Wall Street will shift once again with Microsoft projected to finish 2025 as the top public company.

As mentioned earlier, signs indicate that an AI bubble could either inflate or collapse in 2025, which would impact Nvidia more than any other AI-related stock. I would be surprised if it holds the title of the largest public company by the end of this year.

For Apple, the potential for growth appears limited, which makes it difficult to maintain a P/E ratio above 40. While their high-margin Services division is achieving robust double-digit growth, sales of physical products, especially iPhones, are lagging behind. Aggressive share repurchases may not suffice to keep Apple at the forefront.

In contrast, Microsoft continues to show double-digit sales growth across its various cloud and AI initiatives, and it can depend on long-standing operations like Windows and Office for substantial cash flow. It stands as the best-positioned $3 trillion company among its rivals.

Bank of America collaborates with Motley Fool Money as an advertising partner. John Mackey, the former CEO of Whole Foods Market, which is owned by Amazon, serves on The Motley Fool’s board. Randi Zuckerberg, who previously directed market development at Facebook and is the sister of Meta Platforms CEO Mark Zuckerberg, also holds a position on the board. Suzanne Frey, an executive at Alphabet, is another board member. Sean Williams is invested in Alphabet, Amazon, Bank of America, and Meta Platforms. The Motley Fool maintains positions in and recommends stocks from Alphabet, Amazon, Apple, Bank of America, Bitcoin, Chipotle Mexican Grill, Costco Wholesale, Meta Platforms, Microsoft, Nvidia, Pfizer, and Tesla. The Motley Fool also recommends Johnson & Johnson and advises on the following options: long January 2026 $395 calls on Microsoft, short December 2024 $54 puts on Chipotle Mexican Grill, and short January 2026 $405 calls on Microsoft. The Motley Fool has specific disclosure policies.

The Motley Fool is a content partner of YSL News, providing financial insights and commentary aimed at empowering individuals to take charge of their financial futures. Their content is produced independently from YSL News.

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