Why one firm sees the US stock market headed for a third-straight year of 20% gains in 2025

• The US stock market could see gains of more than 20% in 2025, Capital Economics said.
• It would mark the third consecutive year of gains over 20% for the benchmark index.
• AI enthusiasm and US economic strength will be key drivers of market strength this year.

The US stock market could nail a hat trick of more than 20% gains for a third straight year in 2025, according to strategists at Capital Economics.

If the projection proves true, it would be only the second time in the stock market's history that saw gains of that magnitude three years in a row.

The last time the stock market performed a 20%+ year hat trick was during the dot-com bubble of the late 1990's, when the S&P 500 gained 31% in 1997, 27% in 1998, and 20% in 1999.

The S&P 500 returned about 24% in 2023 and 23% in 2024.

The note said the two driving forces that will fuel the continued bull rally this year are similar to last year's: investor enthusiasm for AI and US exceptionalism.

"We think that enthusiasm around AI will boost US 'big-tech' stock prices further, especially through higher valuations, with gains broadening across the stock market," Diana Iovanel, senior markets economist at Capital Economics said.

Iovanel highlighted that valuations for US stocks are still well below the peak seen during the dot-com bubble on a price-to-earnings ratio, suggesting there's more room to run.

"And the excess earning yield of the sectors containing big-tech stocks — a valuation measure accounting for real 'risk-free' yields — is still far above its level at the peak of that bubble," Iovanel said.

Another reason the US stock market should perform well is because the US economy is on such solid footing, especially relative to its peers.

Iovanel said the US economy should continue outperforming major advanced economies in 2025, which will help raise corporate earnings expectations.

The note added that a second Donald Trump administration should make the US stock market even more attractive relative to international markets, in part due to proposed trade policies.

"Although Trump's presidency may limit the performance of the US stock market in absolute terms, we expect it to help its relative performance by hindering the prospects of non-US equities through universal tariffs," Iovanel said.