As recently as last June, many stock analysts predicted the stock market would end 2025 without any real gains.
At the time, several prominent forecasters projected the S&P 500 index would close out the year in a range between 5,600 and 6,100. The S&P had started the year around 5,900.
When a turbulent 2025 finally ended, the S&P closed at 6,845.5, up more than 16%.
That was great news for stock owners. But it also raised some questions in hindsight: How could so many forecasters have been that far off on where the market was headed? What changed between June and December?
To answer them, let’s go back to the start of 2025.
The S&P had finished 2024 at 5,881.6, wrapping a spectacular year that saw the index rise by 23%.
In a typical year, stock forecasters “tend to cluster around 5% to 10% gains in their year-end forecasts,” said Jeffrey Buchbinder, chief equity strategist at LPL Financial.
Stocks gain about 10% in an average year. So, all else equal, a year-end forecast in the 5%-10% range isn’t likely to be far off.
LPL Financial forecast the S&P would end 2025 somewhere between 6,275 and 6,375, gaining roughly 7%-8%, according to a Jan. 1 roundup of stock market forecasts by Bloomberg. Bank of America predicted, rather ominously, that the S&P would end the year at 6,666. JPMorgan Chase put the figure at 6,500.
But many of those forecasts shifted dramatically after President Donald Trump’s so-called “Liberation Day.” On April 2, Trump announced a universal 10% tariff on all imports, with additional import taxes on many countries, which the president displayed on an oversized board.
By April 8, the S&P had plummeted below 5,000, down almost 20% from its then-record high of two months earlier.
“Investors sold first and asked questions later,” said David Meier, a senior investment analyst at The Motley Fool.
Traders feared Trump’s tariffs would seed runaway inflation, and that consumers would stop spending. They also feared the unknown: U.S. tariffs hadn’t ranged so high in more than half a century.
“The tariff rates that he had on the board were essentially ridiculous,” Meier said. “Meaning, they were so high but did not have any real justification under them. So, the market reacted, in my opinion, perfectly rationally.”
A week after Liberation Day, Trump paused most of his “reciprocal” tariffs, dialing them back to 10%. The stock market soared.
“The worst-case scenario following Liberation Day did not come to pass,” said Eric Teal, chief investment officer at Comerica Wealth Management.
But uncertainty remained, and the S&P would not reach a new record high until late June.
It was during those spring months that stock market forecasters dialed back their projections and recast 2025 as a year of meager gains.
Analysts still widely believed Trump’s tariffs would trigger inflation and hamper spending. They feared a recession.
“I think analysts had a hard time pricing that uncertainty and ended up being too conservative,” Buchbinder said.
The worst fears did not bear out. America’s annual inflation rate never climbed past 3%.
Dire predictions about tariffs and inflation assumed American consumers would bear the brunt of those taxes.
That didn’t happen. Only about 20% of Trump’s tariffs “passed through” to consumers, according to a study by the National Bureau of Economic Research. As imported products traveled from their country of origin to American retailers to consumers, the tariff impact softened at every stop.
“That inflation never really showed up,” Buchbinder said. “Companies did a really good job managing it. Our trade partners ate some of it.”
Another factor that dampened stock predictions for 2025 was the prospect of an AI bubble.
Throughout that year and into this one, Wall Street observers have debated whether the stock market has entered “bubble” territory: In this case, a runup in the prices of tech stocks, fueled by outsized expectations about artificial intelligence.
Perhaps the best evidence of a bubble lies in ratios of stock prices to company earnings, which sit at a historic high.
Price-to-earnings ratios tell you if a stock is overvalued. A common yardstick, the cyclically adjusted price-to-earnings ratio, or CAPE ratio, stands at 40.42 for the S&P 500, as of Jan. 21.
That metric ranged higher only once before, at the peak of the dot-com bubble in 1999-2000.
Investor surveys suggest that stock owners know all about the AI bubble. They continue to buy AI stocks anyway.
In a recent survey by The Motley Fool, 93% of investors with AI stocks said they plan to hold or expand those investments over the next year. Only 7% plan to decrease their AI holdings.
AI investment “just blew past everybody’s expectations” in 2025, and corporate earnings came in higher than expected, Buchbinder said. Those trends drove stock prices higher.
What, then, do forecasters expect from the stock market in 2026?
LPL predicts the S&P 500 will end the year at 7,400, an 8% gain. Comerica Wealth sets the same target. Wells Fargo Investment Institute has a year-end target of 7,500, a nearly 10% gain.
The biggest drag on those projections might be the looming midterm elections: Midterms tend to work out poorly for the party in power, seeding potential volatility.
“We’ve really emphasized playing defense this year,” Teal said.
On the plus side, investors may feel growing confidence in the economic pragmatism of the president.
One lesson of Liberation Day, to many economic observers, was Trump’s sensitivity to stocks. His April 2 tariffs lasted one week. At other pivotal moments in his second administration, Trump has backed off from policy decisions that sent the stock market reeling.
For stock traders, that’s a welcome trend.
“The president, given enough time, really does care about the markets,” said Sameer Samana, head of global equities and real assets at Wells Fargo Investment Institute. “That seems to be his report card for himself.”
This article originally appeared on USA TODAY: Stocks overachieved in 2025. Here’s what to expect in 2026.
