After two years of annual gains north of 20% for the S&P 500 (^GSPC), Wall Street strategists think 2025 will see a more measured year for stocks.

On Monday, BMO Capital Markets chief investment strategist Brian Belski initiated a 2025 year-end target of 6,700 for the S&P 500. On Sunday, Morgan Stanley chief investment officer Mike Wilson issued a 12-month target of 6,500 for the S&P 500.

Belski’s target reflects about 14% upside from Friday’s close; the strategist already has a 6,100 year-end target for 2024. This puts Belski’s forecast for returns in 2025 at 9.8%, right in line with the index’s average historical gain. Wilson’s 12-month target represents a nearly 11% increase for the benchmark index over the next year.

Should the S&P 500 finish 2024 with a gain above 20%, it would mark the first time the benchmark index has posted consecutive years with gains of 20% or more since the tech bubble of 1998-1999.

Any way you slice it, then, these outlooks say the outsized returns the S&P 500 has enjoyed for each of the past two years will come to an end in 2025.

“It is clearly time for markets to take a somewhat of a breather,” Belski wrote.

“Bull markets can, will and should slow their pace from time-to-time, a period of digestion that in turn only accentuates the health of the underlying secular bull. So we believe 2025 will likely [be] defined by a more normalized return environment with more balanced performance across sectors, sizes, and styles.”

Belski points out that the historical pattern for bull markets sees returns in year three come in below gains for the first two years and below the index’s typical average return.

“Now that inflation, interest rates (zero percent is NOT normal) and employment are showing signs of stabilizing (volatility diminishing), US stock fundamentals have their best chance to normalize,” Belski wrote.

“According to our work, an environment of high single digit annual price gains coupled with at or near double digit earnings growth and price to earnings ratios in the high teens to low twenties over the next few years would be a good start on the path to normalization.”

With the Federal Reserve cutting interest rates while US economic growth remains strong, both Belski and Wilson believe in a continued broadening of the stock market rally, where more than just a few high-flying tech names are driving the market action.

“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. “A potential rise in corporate animal spirits post the election could catalyze a more balanced earnings profile across the market in 2025.”

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Wilson and Belski agree that this likely creates stock-picking opportunities beneath the surface of the S&P 500.

But it could also be part of what leads to lower returns at the index level, with smaller stocks by definition having less of an impact on the movement of the overall index.

“We believe the slight [second half of 2024] rotation out of technology+ mega cap stocks is a trend that will likely continue and if so, the sheer size of the stocks within the index will make big market gains more difficult (but not impossible) to achieve as the rest of the S&P 500 plays the catch-up game,” Belski wrote.

Josh Schafer is a reporter for Yahoo Finance. Follow him on X @_joshschafer.

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