5 Reasons Why Wall Street ETFs Could Gain in 2025

As 2024 comes to an end, U.S. equities are reaching new highs with no signs of slowing down. The S&P 500 just recorded its best month of 2024 in November. The Nasdaq-100-based exchange-traded fund (ETF) Invesco QQQ QQQ hit an all-time high this week.

Here are five reasons why the bulls are likely to maintain their momentum.

A Dovish Fed Bodes Well for Stocks

With inflation subsiding, Federal Reserve Chairman Jerome Powell seems intent on providing the market with liquidity. Wall Street is pricing in a 60% chance of a rate cut when the Fed meeting commences later this month. While a Trump era may drive inflation higher, the Fed is unlikely to return to a hawkish mode. We anticipate a status quo on rates in 2025 or lower rates from 2024.

Continued Improvement in Profitability Across Businesses

Through Nov. 22^nd, we have seen Q3 results from 476 S&P 500 members, or 92.2% of the index’s total membership. Total earnings for these 476 companies that have reported are up 8.1% from the same period last year on 5.5% higher revenues, with 73.7% of the companies beating EPS estimates and 61.8% beating revenue estimates. The proportion of these 476 index members beating both EPS and revenue estimates is 51.1%.

Stronger Economic Growth

The U.S. real gross domestic product (GDP) grew at a 2.8% annualized rate in the third quarter of 2024. Apart from continued weakness in the housing and manufacturing sectors, most recent activity indicators suggest economic growth momentum continues to run slightly above trend.

However, growth has moderated since the fourth quarter of last year. On a year-end basis, S&P Global expects growth to come in at 2.0% in the fourth quarter of 2024, down from 3.1% in fourth-quarter 2023.

There is high importance of economic growth to stock market outcomes. Historically, when GDP growth ranged between 2.1%-3%, stocks gained 70% of the time, with an average return of nearly 11%, per RBC Capital Markets’ Lori Calvasina, as quoted on Yahoo Finance..

Upbeat Year Ahead for Mergers and Acquisitions?

The merger & acquisition (M&A) market has experienced significant volatility, from the pandemic-induced downturn in 2020 to a remarkable recovery in 2021, followed by a sharp decline in 2023. Third-quarter 2024 saw a slight increase in global M&A deal notifications, marking the second consecutive quarter of growth (read: Upbeat Year Ahead for Mergers and Acquisitions? ETFs to Consider).

Even though the increase in the M&A activity was modest, the positive shift is notable. Easing financial market conditions, fueled by the Fed's interest rate cuts, rising expectations of further rate reductions and moderating inflation, will play a key role in driving the M&A market.

Trend is Your Friend?

When the S&P 500 Index gains more than 20% for two consecutive years (as it has done so far), forward returns tend to be strong. The S&P 500 was up about 24% in 2023 and has similarly gained 27.8% this year. Cooling inflation, a less-hawkish Fed, an AI boom, a tech rally and an improvement in corporate earnings have led the key Wall Street stock index to log more than 20% gain in back-to-back years. Most of the drivers are in place for a positive 2025.

Wall Street ETFs in Focus

With this optimism in the air, investors can stay focused oniShares Core S&P Total US Stock Market ETF ITOT, QQQ, iShares Core S&P 500 ETF IVV, iShares Russell 2000 ETF IWM and SPDR Dow Jones Industrial Average ETF Trust DIA.

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