2025 US equity market outlook

Revisit the ’90s playbook for clues to 2025 and beyond

Investors looking to gauge the direction of markets in 2025 may want to look back a few decades. The 1990s—a phenomenal 10-year period for US equity markets—offer great perspective and reasons for optimism.

For the decade of the 1990s, the S&P 500 Index delivered an impressive 430% total return. This included annual returns of more than 20% for five consecutive years, 1995–1999.¹ The decade had a rough start with a recession, and 10-year Treasury yields spiked as “bond vigilantes” worked to coax the Clinton administration and Congress to rein in government spending. A number of other headwinds—from the 1997 Asian financial crisis to the 1998 Russian ruble crisis and even the threat in 1999 of disruptions from Y2K— brought fears of financial contagion and bouts of extreme volatility to equity markets. On average, the VIX (Cboe Volatility Index) was in the mid-20s in the 1990s, versus a more benign mid-teens average in the current decade.² Despite this higher monthly volatility, the equity market consistently marched higher over time.

Emerging world-changing technology moved markets

So what propelled those 1990s markets? US gross domestic product grew at a robust 3%-5%, yet inflation was moderate. But most notable were three coinciding technology-led investment super cycles. One was “WinTel,” an alliance between Microsoft and chipmaker Intel that bolstered the widespread adoption of personal computers. At the same time, the dawn of the world wide web and the commercialization of mobile/wireless technology prompted a massive investment cycle in telecommunications infrastructure.

The parallel today is artificial intelligence (AI)—another nascent and potentially world-changing technology. For many businesses, AI is perceived as a “winner-take-all” opportunity or threat, with the “losers” left empty handed. This has spurred a super cycle of investment spending with implications that transcend the technology sector.

Like in the 1990s, we see coinciding mega trillion-dollar investment waves today, many in response to disruptive technology. Today’s investments are tied to power infrastructure upgrades, global supply chain redundancy, climate solutions and carbon reduction, and a US housing shortage. And similar to the 1990s, there are smoldering hotspots for geopolitical and economic crises. For the latter, this includes an ugly imbalance in commercial real estate, massive government deficits that need to be refinanced, and a precarious economic imbalance in China.

Comparable rate environments

In the 1990s, the federal funds rate and 10-year Treasury yields were typically 5% or higher. Inflation was 2.5%–3.0%, consistently above the Federal Reserve’s (Fed’s) current target of 2% and similar to this calendar year. Also, in the 1990s, real yields were quite positive, meaning interest rates were higher than inflation, as they finally are again today. In contrast, for most of the past 15 years—in the aftermath of the global financial crisis—we had negative real yields and “cheap money” in the form of lower borrowing costs.

Today, one pronounced fear is that, with positive real yields and “easy money” in the rear-view mirror, the economy is sure to sputter without more aggressive rate-cutting by the Fed. So far, the economy has been resilient, inflation is now contained, and thanks to overcapacity in China, deflationary forces related to goods are strong enough to offset pockets of inflationary pressures seen in labor and services. This goldilocks economic environment can be sustainable. Yes, with the Fed’s interest-rate cut in September, we officially turned the page to a new chapter for US fixed-income and equity markets. But in our view, the equity market is not beholden to further rate cuts to sustain its rally.

Earnings growth is key for continued market gains

Today, equity multiples are no longer supported by low bond yields, and the market’s current valuation is considerably above average at 24x 2024 earnings and 21x 2025 earnings.³ When stocks are expensive, earnings—and earnings growth—matter.

In the coming year, industry supply/demand forces should return to forefront, and the backdrop is changing for the 10 largest companies, which now account for about 35% of the S&P 500. In general, we anticipate a bumpier road ahead for this cohort. As we approach a new year, these businesses face a mix of headwinds and tailwinds. Sustained growth of AI infrastructure spending as well as productivity gains from AI will enhance the fundamentals of some companies. Others might be challenged by an oversupply of electric vehicles, competition in search, slowing demand for cloud computing, and a reduction in appetite for western goods sold in China. Similar to 2024, when just four of the top 10 weights in the S&P 500 meaningfully outperformed the index, we expect a wide dispersion of returns in 2025 from these giants.

What is underappreciated is that over the past 12 months, the 10 largest companies by market capitalization have accounted for all of the year’s earnings growth; meaning, we have seen no growth from the other 490 stocks in aggregate.⁴ This arguably is a good starting point for this group. Expectations are low, and economic pressures have forced businesses to make improvements. Of course, not all will show improving fundamentals or outperform the market; most companies probably won’t. But those that can capture the upcycles should see improved earnings growth and simultaneously get rewarded with higher price-earnings multiples. This should translate to strong performance for their shares. On the contrary, when companies disappoint, their multiples will likely contract sharply.

All this points to higher volatility in the coming year. The super cycles will keep the economy chugging along, and AI should soon show up in better labor productivity numbers. While we don’t claim to have a crystal ball, if things play out as we anticipate, the market could finish 2025 with a double-digit gain, helped by solid earnings growth and further-expanding multiples.⁵ Just like in the 1990s, however, it won’t be a smooth ride—it would be prudent to buckle up.