The US stock market is poised for a historic achievement in 2025, with strategists at Capital Economics projecting gains exceeding 20% for the third consecutive year. This remarkable feat would mark only the second time in stock market history that such sustained growth has occurred over three years. The last instance was during the dot-com bubble of the late 1990s, when the S&P 500 surged 31% in 1997, 27% in 1998, and 20% in 1999.
The S&P 500 has already demonstrated impressive performance, returning approximately 24% in 2023 and 23% in 2024. According to Capital Economics, two primary forces will drive the continued bull rally in 2025: investor enthusiasm for artificial intelligence and US economic exceptionalism.
Diana Iovanel, senior markets economist at Capital Economics, emphasized that AI enthusiasm will be a crucial catalyst for US big-tech stock prices, particularly through higher valuations. The gains are expected to broaden across the entire stock market, not just technology sectors. Importantly, Iovanel noted that current valuations for US stocks remain well below the peak seen during the dot-com bubble when measured by price-to-earnings ratios, suggesting significant room for continued growth.
The analysis also highlights that the excess earning yield of sectors containing big-tech stocks—a valuation measure that accounts for real ‘risk-free’ yields—remains far above its level at the peak of the dot-com bubble. This metric provides additional confidence that the market isn’t overheated despite consecutive years of strong gains.
Beyond AI, the robust US economy serves as another pillar supporting the bullish outlook. The US is expected to continue outperforming major advanced economies in 2025, which should help raise corporate earnings expectations and provide fundamental support for stock prices.
The incoming second Trump administration is also expected to enhance the US stock market’s attractiveness relative to international markets. While Trump’s presidency may impose some limitations on absolute market performance, his proposed trade policies, including universal tariffs, are anticipated to hinder non-US equities’ prospects, thereby boosting the relative performance of American stocks in the global marketplace.
Key Quotes
We think that enthusiasm around AI will boost US ‘big-tech’ stock prices further, especially through higher valuations, with gains broadening across the stock market
Diana Iovanel, senior markets economist at Capital Economics, explained how AI enthusiasm will be a key driver of market performance in 2025, emphasizing that the benefits will extend beyond just technology stocks to the broader market.
And the excess earning yield of the sectors containing big-tech stocks — a valuation measure accounting for real ‘risk-free’ yields — is still far above its level at the peak of that bubble
Iovanel provided reassurance that despite consecutive years of 20%+ gains, current market valuations remain fundamentally healthier than during the dot-com bubble, suggesting the AI-driven rally has room to continue.
Although Trump’s presidency may limit the performance of the US stock market in absolute terms, we expect it to help its relative performance by hindering the prospects of non-US equities through universal tariffs
Iovanel outlined how trade policy under the second Trump administration could make US stocks, including AI-focused companies, more attractive compared to international alternatives.
Our Take
The positioning of AI as a primary market driver alongside US economic exceptionalism underscores how deeply artificial intelligence has become embedded in investor psychology and market fundamentals. This isn’t merely speculative enthusiasm—it reflects genuine transformation as companies across sectors integrate AI to improve productivity, create new products, and enhance competitive positioning. The comparison to the dot-com era is both encouraging and cautionary. While the 1990s bubble eventually burst, it also laid the foundation for today’s digital economy. Similarly, current AI investments may experience volatility but are likely building infrastructure for decades of innovation. The key difference is that today’s AI leaders generally have stronger business models and profitability than many dot-com companies. For investors and businesses, this outlook suggests continued opportunities in AI-related investments, though maintaining focus on fundamental value and sustainable growth remains essential to avoid repeating historical mistakes.
Why This Matters
This projection carries significant implications for the AI industry and technology sector, as artificial intelligence is identified as one of the two primary drivers of expected market gains. The continued investor enthusiasm for AI suggests sustained capital flows into AI companies, research, and development, potentially accelerating innovation and deployment of AI technologies across industries. The comparison to the dot-com bubble raises important questions about market sustainability, though analysts argue current valuations remain healthier. For AI companies and big-tech firms, this outlook signals continued investor confidence and potential for higher valuations, which could fuel further expansion, acquisitions, and talent recruitment. The broadening of gains across the market suggests AI’s impact is extending beyond pure-play technology companies into traditional sectors adopting AI solutions. This environment could create favorable conditions for AI startups seeking funding and established companies investing in AI transformation. However, the historical precedent of the dot-com bubble serves as a reminder of the importance of sustainable business models and realistic expectations, even amid technological revolution.
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