Three Reasons to Be Bullish on U.S. Stocks! Can the S&P 500 Index Rise Another 14%?

BMO Capital Markets believes that the S&P 500 index will have more room for growth next year.

The company's Chief Investment Strategist Brian Belski expects that by the end of 2025, the benchmark index will reach 6,700 points, an increase of nearly 14% from its current level.

He told CNBC on Monday that there are three reasons to support this prediction.

First, the stock market is entering the third year of a cyclical bull market. Belski stated, since 1950, the S&P 500 index has typically risen an average of 6% per year during cyclical bull markets.

In the current bull market cycle, the annual gains of U.S. stocks have significantly exceeded historical levels. The S&P 500 index has returned 24% in 2023, and has risen about 23% year-to-date.

Second, Belski indicated that the index is expected to rise more than 6% due to underestimated earnings growth.

With valuations hovering near generational highs, some are concerned that stocks have become too expensive. BlackRock's bond chief Rick Rieder recently stated that earnings growth needs to rise significantly for stock market price-to-earnings ratios to decline.

Belski noted that this scenario could occur and predicted that market breadth would continue to expand, with prosperity no longer limited to a few leading companies. Market breadth has been a concerning issue, with tech giants accounting for about one-third of the S&P 500 index.

“We believe that the expansion of market breadth is real,” Belski said, adding later: “Look at the other 490 stocks in the S&P 500 index; their earnings growth is much faster.

Third, Belski expects the market to continue responding to accommodative monetary policy.

He stated, “If you look at monetary policy and fiscal policy, that is the real reason driving the market, and the train of easing monetary policy has already left the station.”

The Federal Reserve has cut rates twice since September, and CME's FedWatch shows that investors believe there is a 65.3% chance of another 25 basis point cut in December.

Although the market is uncertain about how low rates can go under President Trump's leadership, Goldman Sachs predicts that the federal funds rate will decline by more than 100 basis points next year, to a range of 3.25% to 3.5%.

BMO's forecast is more optimistic than that of other institutions. On Monday, Morgan Stanley updated its 2025 S&P 500 index target price to 6,500 points, stating that high-quality cyclical stocks will outperform the market