The S&P 500 has a shot at notching its best annual gain on record this year, partly thanks to the stunning first-half performance of megacap tech stocks and the late-autumn rally powered by Trump Trade bets on stronger economic growth and fatter corporate profits.
The broadest benchmark of U.S. shares is now up a bit more than 24% this year, gaining around 3.7% this month after President-elect Donald Trump's early November victory and the second consecutive interest rate cut from the Federal Reserve to slow inflation.
The benchmark has printed over 50 all-time highs and added nearly $6 trillion in overall market value this year.
Now, with Nvidia's (NVDA) highly anticipated fiscal third-quarter earnings behind it and the election uncertainty largely erased, stocks could be set for another so-called melt-up that would propel the S&P 500 to top the yearly record 29.6% advance recorded in 2013.
Related: Goldman Sachs analyst leads Nvidia price target overhauls after earnings
While meager so far, the post-earnings gains in Nvidia stock remain a huge component of the market's broader health, given its outsized weighting in the S&P 500 and the tech-focused Nasdaq and its newly minted position in the Dow Jones Industrial Average.
"Nvidia moves the largest amount of money for a single stock in the world each day, dwarfing every other name in both U.S. and international markets," said Kristian Kerr, head of macro strategy at LPL Financial. "Furthermore, the company’s earnings report has essentially reached the same level of importance as a major macroeconomic data release.
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"While Nvidia has consistently topped earnings estimates, and the long-term trend for the chipmaking behemoth has been up and to the right, subsequent one-day price action has been mixed while investors parse results, and semiconductor names face increasing scrutiny in today’s market," she added.
"The post-earnings one-week absolute move for Nvidia over the past 10 years has been slightly below 11%."
Risk appetite, evident in the spate of all-time highs seen in bitcoin prices and the huge amounts of cash moving into U.S. equity funds, suggests the S&P 500 could find the 4.5-percentage-point gain it needs by year's end to reach the 6,185-point level required to deliver a record annual return.
Bank of America's closely tracked Flow Show report, published last week, said global investors are "all-in on Trump 2.0" and are positioned for further gains in U.S. assets into the January 20 inauguration.
Economy is pro-growth, pro-gains for stocks
U.S. stock funds, the report indicated, gathered $55.8 billion in new money last week, the most since March. There were record flows into large-capitalization names and the best new allocation for small-cap funds this year.
Readings from the broader economy also suggest the chances for year-end outperformance are solid.
Walmart (WMT) forecast a solid holiday-spending season, and the Atlanta Fed's GDPNow forecasting tool pegs current-quarter growth at a solid 2.6%, a pace major economies worldwide can only aspire to at this stage of the post-pandemic recovery.
"Looking ahead, solid income growth, pro-cyclical productivity growth and strong labor force participation should remain the key pillars of US exceptionalism," EY's chief economist, Gregory Daco, said.
He cited "stronger private sector confidence on the prospects of pro-business policies and deregulation" supporting spending and investment.
Related: Top Wall Street analyst unveils unexpected S&P 500 price target for 2025
Corporate earnings also underpinned the market's late-autumn gains, with collective third-quarter S&P 500 profits estimated to have risen 8.8% from a year earlier to $527.4 billion. That pace is likely to reach 9.8% over the fourth quarter, LSEG data show.
"I thought earnings season was pretty darn good," said Nancy Tengler, CEO and chief investment officer at Laffer Tengler Investments.
"Earnings are outpacing the macroeconomy as companies expand margins faster than revenue growth," she added. "We have long argued that productivity would save the day, and it seems to be showing up to do the heavy lifting."
Headwinds are a stock market wildcard
Jan Boivin, head of BlackRock's Investment Institute, argues that a "more favorable macro backdrop and upbeat investor sentiment given post-election clarity and hopes for deregulation" have the firm "more pro-risk on a six- to 12-month tactical horizon" despite longer-term uncertainties.
An end-of-year rally will also face headwinds, with U.S. stocks priced at their highest multiple of forward earnings in at least five years. The prospect of renewed inflation risks are also leaning against the prospect of a December interest rate cut from the Federal Reserve.
Related: Mortgage rates pose new threat to housing market, frustrating buyers
CME Group's FedWatch, in fact, now pegs the odds of a quarter-point reduction at around 50%, and Fed officials' comments suggest the central bank is willing to be patient as it awaits the impact of tax, tariff and immigration policies from the incoming Trump administration.
Geopolitical risks are also simmering, with Russia's attacks on Ukraine threatening to devolve into a wider and more deadly conflict, and the ongoing tensions between Israel and its Arab Gulf neighbors risk drawing Iran into a broader regional war.
Inflation is a stock market bugaboo, but S&P 500 targets ratchet higher
The earnings picture is also narrowing, with negative preannouncements heading into the fourth quarter rising at a 2.2 ratio to positive ones, according to LSEG data. That suggests the corporate sector is more cautious.
Also weighing on the major stock market indexes is the potential impact of Trump's policy suite. Significant tax cuts, historic tariffs on imported goods, and the threat of mass deportation of immigrants could hollow out key sectors of the labor market and stoke inflation.
Related: Walmart issues warning as Trump preps massive tariff hikes
“We anticipate that labor-market disruptions caused by an immediate border closing and deportations over the course of 2025 will boost wage pressures by the latter part of next year, most noticeably in agribusiness, construction, and labor-intensive services,” Wells Fargo analysts wrote in a report published this week.
More Economic Analysis:
- Top Wall Street analyst unveils unexpected S&P 500 price target for 2025
- October retail sales add further complexity to Fed rate cut bets
- CPI inflation sparks Fed interest rate cut bets
The bank also sees higher Consumer Price Index inflation and higher Treasury bond yields. However, it expects these to be offset by stronger corporate earnings, GDP growth, and the extension of the 2018 Republican-led tax cuts.
Wells Fargo analysts raised the S&P 500's end-2025 price target to 6,700 points, noting that "deregulation is likely and should support profit margins."
"In a market where the Fed is in a rate-cutting cycle, the economy is likely to benefit from pro-growth policies," says Jan Szilagyi, CEO of Reflexivity, which uses AI to guide investment strategy and decisions. "This is not a bearish market environment."
Related: Veteran fund manager sees world of pain coming for stocks
