The early results are in and Wall Street strategists are issuing 2025 forecasts, suggesting the S&P 500 (^GSPC) rally will continue over the next 12 months. However, one of the most popular market themes of the past 18 months, artificial intelligence, is missing from their baseline calls.AI's Impact on the Market
AI driving the market higher has been a significant feature since the spring of 2023 when Nvidia's first blowout earnings report kickstarted a bull market rally. BMO Capital Markets chief investment strategist Brian Belski initiated a 2025 year-end target of 6,700 for the S&P 500, while Morgan Stanley chief investment officer Mike Wilson issued a 12-month target of 6,500. Neither strategist leaned too heavily into the impact of AI on driving stocks higher, perhaps indicating a maturing bull market. Instead, they discussed the further broadening of the rally away from the tech-concentrated stock market of the past two years. 1: "We expect this broadening in earnings growth to continue as the Fed cuts rates into next year and business cycle indicators continue to improve," Wilson wrote. Belski's work shows that the market has already broadened, with 276 stocks outperforming the S&P 500 in the second half of 2024, which is better than the 10-year average of 238 and above the number seen since the start of 2023. At the surface, this can lead to weaker gains for the index as smaller gains in small companies result in smaller overall gains. Dating back to 1990, Belski found that when the top 100 stocks in the S&P 500 outperform, the index delivers an average annual return of 11.8% compared to 8% when those stocks underperform. 2: It's important to note that the idea that an AI-related fever could keep driving stock prices higher hasn't been forgotten among Wall Street strategists. Just two weeks ago, Evercore ISI's Julian Emanuel wrote that he sees the S&P 500 reaching 6,600 by June 2025 as "exuberance lies ahead" amid a "public reengaged in speculation." Wilson also offered a bull case where wide AI adoption juices margins and pushes the flagship index near 7,400.Implications for Investors
For any investor in the S&P 500, the prospect of reaching these targets sounds appealing. But perhaps even more important is that strategists no longer need to rely solely on AI to explain why the market will keep moving higher. Even if AI doesn't play a significant role, Wall Street still expects a good time for the market. This shows that the market is evolving and there are other factors at play besides AI. 1: Investors need to be aware of these changing dynamics and adjust their strategies accordingly. While AI has been a driving force in the past, it may not be the only factor determining the market's future performance. By looking at broader economic indicators and company fundamentals, investors can make more informed decisions. 2: Additionally, the fact that strategists are no longer overly focused on AI indicates a more mature market. This means that investors need to be more discerning in their choices and look for companies with sustainable growth prospects rather than simply relying on the hype around AI. In conclusion, while AI remains an important factor in the market, it is not the only one, and investors need to consider a wider range of factors when making investment decisions.
