2024 was a perfect year for overseas investors, especially those investing in the U.S. stock market. The annual growth rates of the Nasdaq Composite Index and the S&P 500 Index recorded around 30%. In contrast, the KOSPI and KOSDAQ indices finished the year down 9.9% and 21.7%, respectively, from the beginning of the year. Nowadays, nine out of ten individual investors in stocks ask the same question: "Will the U.S. stock market continue to soar in 2025?" While optimism prevails, a creeping pessimism is also emerging. Opinions about bullish and bearish markets were gathered.[Editor’s note]
There are concerns about a possible adjustment in the U.S. stock market in 2025 due to last year's sharp rise, but there is also a significant amount of optimism that the bullish trend will continue. Historically, when a U.S. president is inaugurated, they tend to introduce policies that bolster the economy in their first year, which often leads the S&P to show upward momentum. This is particularly relevant as the Donald Trump administration is set to take office in January 2025.
Increasingly, the profitability of corporations that greatly influences stock prices is expected to be relatively superior among U.S. firms. The expectation that the shift from tight to loose monetary policy will invigorate the stock market adds to this optimism.
According to the financial investment industry on the 1st, the S&P 500 Index has only declined in the first year of a presidency since 1989 once—when President George W. Bush's first administration began in 2001. At that time, the collapse of the 'dot-com bubble' and the impact of the 9/11 attacks significantly shook the market.
After that, the S&P 500 Index has been bullish every year in the first year of a presidency. In 2017, when President Trump was inaugurated, it rose by 19.4%, and in 2021, when President Joe Biden assumed office, it increased by 26.9%. The new administration's need for performance weighed heavy on economic policy, which helped the stock market gain momentum.
The corporate tax cut proposed by the Trump administration is likely to have a positive impact on corporations' profitability right away. The president-elect has declared that he will lower corporate taxes to 15%. When the Trump administration cut corporate taxes from 35% to 21%, there was optimism that corporate performance would improve, leading to a rise in stock prices.
If the president-elect lowers personal income taxes alongside corporate taxes, disposable income could increase, supporting the domestic economy. Additionally, the plan to increase oil production by about 20% and to cut unnecessary government department budgets and personnel are also seen as policies that could have a positive effect on the market.
Lee Young-gon, head of research at Toss Securities, noted that "the tax cut policy has the effect of increasing available funds for both corporations and households, and it is expected to lead to expanded corporate investments and household consumption, thus revitalizing the domestic economy." He added that "as the Trump administration intends to reduce regulations and seek efficiencies, traditional regulated industries like finance, energy, and infrastructure could benefit."
Of course, there are considerable concerns regarding the president-elect's tariff policies. The president-elect mentioned implementing universal tariffs of 60% on China and 10% on Canada and Mexico, which could stimulate inflation again due to rising import prices. However, as legislation will be required, it is unlikely that such measures will be implemented immediately in 2025.
◇ Fund circulation from American corporate growth
The optimism regarding the U.S. stock market is also grounded in corporate competitiveness. Last year, the earnings per share (EPS) of companies in the S&P 500 Index was estimated to have increased by about 9% compared to 2023, with projections for 2025 indicating a growth of more than 10%. For companies in the Nasdaq Composite Index, the EPS growth rate is expected to exceed 30% in 2025.
This is due to the outstanding competitive edge of U.S. corporations in growing industries represented by artificial intelligence (AI). In particular, the increase in EPS acts as a driving force that enables corporations to more easily raise funds.
Kim Sung-hwan, a researcher at Shinhan Investment Corporation, emphasized that the price-earnings ratio (PER; market capitalization ÷ net income) and EPS move in a reinforcing direction based on George Soros' 'theory of reflexivity.'
He stated that "reflecting on the current stock market, U.S. corporations, including those in AI, have become easier to raise capital through rising stock prices, and their fundamentals are in a position to improve." He added that "when economic conditions improve, it is highly likely that the market will respond with another surge in stock prices."
U.S. corporations are actively returning profits to shareholders with the money they earn, creating a positive cycle. The annual share buyback amount for companies in the S&P 500 Index has quadrupled over the past 10 years, approaching $900 billion (about 1,300 trillion won) this year. It is expected to surpass $1 trillion in 2025. As the number of shares decreases, the EPS effect becomes greater.
◇ End of QT and interest rate cuts, funds flowing into the stock market
Concerns about liquidity are not significant. The Federal Reserve (Fed) embarked on quantitative tightening (QT) in June 2022 to combat inflation. On the surface, it was aimed at reducing liquidity; however, in practice, money flowed into the stock market.
Looking at the reverse repurchase agreement (RRP) balance, which underwent the most adjustments during the Fed's asset reduction process, it has decreased by nearly $1.8 trillion (about 2,600 trillion won) over the past two years. A reverse repurchase agreement is when the Fed borrows money from commercial banks with U.S. government bonds as collateral. An increase in the reverse repo indicates that the Fed has absorbed that much liquidity from the market. Conversely, a decrease in the RRP balance suggests that liquidity in the stock market has increased.
Kim Seok-hwan, a researcher at Mirae Asset Securities, stated that "the decrease in the RRP and the Treasury General Account (TGA) balance can lead to an increase in market liquidity," adding that "although it might seem that liquidity is decreasing due to the Fed's QT, this is because funds are flowing into investment avenues like stocks." He mentioned this as "a supply factor that further solidifies expectations of a rally in the U.S. stock market at the beginning of the year."
While the reverse repurchase agreement balance has turned upward at the year-end, the market expects that the Fed will conclude its QT around the second half of 2025. This is likewise a positive factor concerning liquidity supply. Although it falls short of market expectations, the Fed is anticipated to lower the benchmark interest rate by 0.25 percentage points twice by the end of 2025.