State Street Global Advisors, the third-largest ETF issuer with $1.5 trillion in assets, forecasts a continued stock market rally through 2025. This projection, detailed in their 2025 ETF Market Outlook, suggests this could be the fourth successful soft landing in U.S. history, drawing parallels to the market surge following the 1995 soft landing. During that period, the S&P 500 achieved five consecutive years of returns exceeding 20%. State Street believes similar conditions, such as anticipated Fed rate cuts and technological advancements, could ignite another extended period of market gains.
Table Content:
Historical Parallels and Current Market Momentum
This optimistic outlook coincides with a strong performance in 2024, with the S&P 500 (SPY) experiencing a 29% gain year-to-date. ETFs have also witnessed over $1 trillion in inflows for the first time. This surge is attributed to various factors, including the growth driven by artificial intelligence and the financial industry, the post-covid economic recovery, and expectations of a business-friendly regulatory environment under a re-elected Donald Trump administration. “Historically, economic growth has accelerated in the years following a soft landing. And that pattern is likely to repeat in 2025,” states Michael Arone, State Street’s chief investment strategist.
Anticipated Fed Rate Cuts and Economic Tailwinds
State Street anticipates Fed rate cuts of 0.75% to 1% next year, down from the current 4.5% to 4.75% federal funds rate. These cuts are expected to stimulate capital formation through increased IPO activity, mergers and acquisitions, and capital expenditures. This projection is supported by several key factors: resilient corporate profits with anticipated 15% S&P 500 earnings growth in 2025; a robust labor market with over 2.1 million jobs added in the past year; and declining inflation, with core PCE falling from 3.2% to 2.8%. Arone, along with Matthew Bartolini, Head of SPDR Americas Research, and Senior Research Strategist Anqi Dong, highlight these economic tailwinds as key drivers for their bullish outlook.
Investment Opportunities and Potential Volatility
State Street identifies promising opportunities in U.S. small caps, regional banks, and companies involved in artificial intelligence. Small cap valuations, in particular, appear attractive compared to large caps, trading below their 20-year average despite improved growth prospects. However, the report cautions that increased market volatility could accompany faster economic growth, referencing the turbulent period following the 1995 soft landing, which included events like the Asian currency crisis and the Russian debt default.
Diversification Strategies for Managing Risk
To mitigate potential volatility, State Street advises investors to diversify their portfolios with assets like commodities and gold, which historically perform well during periods of market stress, especially when stock market volatility significantly exceeds normal levels. “Fed rate cuts combined with lower potential energy costs, lighter regulation, and lower taxes could unleash a period of massive capital formation through IPOs, M&A, and increased capital expenditures,” Arone emphasizes.
Conclusion: A Bullish Outlook with Potential Challenges
State Street’s 2025 outlook paints a bullish picture for the stock market, driven by anticipated Fed rate cuts, technological advancements, and robust economic fundamentals. However, the firm acknowledges the potential for increased market volatility and encourages investors to consider diversification strategies to manage risk. The coming years promise significant opportunities, but navigating potential challenges will be crucial for investors seeking to capitalize on this projected period of growth.
