The Last Major Wall Street S&P 500 Forecast: Citi’s Expectations for 2025

Wall Street Forecasts a Volatile Future for Equities

As the year draws to a close, investors are keenly watching the S&P 500’s trajectory, with the latest forecast from Citigroup shedding light on what lies ahead in 2025. According to a team of strategists led by Scott Chronert, Citi projects a base case target of 6,500 for the S&P 500, with a bull case of 6,900 and a bear case scenario suggesting a drop to 5,100. This positions Citi’s forecast in the median range of other Wall Street predictions, which oscillate between 6,400 and 7,000.

Balancing Opportunity with Caution

In their comprehensive analysis, Chronert and his colleagues point out a common theme circulating through their predictions: “modest earnings growth at worst” paired with a “still above-average index multiple at year-end.” Despite the positive economic fundamentals and the anticipated contributions from artificial intelligence and productivity gains, there is a significant word of caution surrounding “lofty expectations” that may overshadow investor sentiment heading into 2025.

“We believe post-election euphoria reflects confidence in longer-term growth drivers,” they noted in a communication dated December 6. However, they were quick to highlight the myriad of issues that investors must navigate, suggesting that while optimism exists, significant challenges loom on the horizon.

High Valuations Present a Challenge

Concerns regarding valuation are a central tenet of Citi’s outlook. The analysts emphasize that the market is currently positioned in the highest trailing price-to-earnings (P/E) ratio decile, a stark warning for the future. Historically, this valuation level has proven to be a negative risk-reward zone, with median returns tending to be negative, and downturns often exceeding potential gains.

According to Citi, the trailing P/E ratio currently stands at 28.4. The analysts express concern, stating, “The key is considering high valuation more through a lens of what’s implied in underlying growth, which is elevated but unattainable at this time.” They recommend that investors tread carefully, pointing out that historical data dictates a cautious approach when entering the market from such inflated starting points.

Beyond the Magnificent 7

Interestingly, the concerns regarding high valuations cannot be solely attributed to the influence of tech behemoths, referred to as the “Magnificent 7.” Citi’s strategists clarify that the other 493 stocks in the S&P 500 are trading at their highest forward P/E relative to their own historical metrics over the past 20 years. This expansion across a broader spectrum of the index signifies that the euphoria is not confined to just a few heavyweights.

Investor Complacency and High Hurdles Ahead

With current investor sentiment reaching a state of “euphoria,” as illustrated by Citi’s Levkovich Index, there lies a “high hurdle” for stocks to overcome. This state of investor complacency indicates an environment ripe for volatility as we transition into 2025. The index notably highlights that we are in an euphoric phase rare in its extremes, even when compared to the Tech Bubble and the post-pandemic rally.

Citi warns that this environment presents lessons from history: “buying expensive on the premise that one can sell more expensive is a generous premise.” Investors must weigh the prospect of engaging in the market amidst high valuations against the backdrop of potential downturns—a precarious balance that many will have to navigate in the coming year.

Final Thoughts on the 2025 Market Outlook

In summary, Citigroup’s forecast positions the S&P 500 on a trajectory towards growth in 2025, though marked by anticipated volatility and challenges posed by elevated valuations. The intertwining of soft economic fundamentals and the burgeoning impact of artificial intelligence paints a complex picture for investors. As optimism reigns, prudent investors should remain vigilant, acknowledging that the current climate may require a reevaluation of expectations to successfully navigate the potentially tumultuous waters ahead.