COVER STORY as bond vigilantes ,” Hooper says . Bond investors are “ more like guardian angels . They want to see some kind of fiscal prudence .”
However , for equities , positive returns beget more positive returns — or so the prevailing conventional wisdom holds for now . The return of President Trump and his pro-business agenda are viewed by many investors as just what this aging bull market needs . Between August 5 and December 16 of last year , the S & P 500 rose 19 %, rivaling the ascent in bond yields .
Trump ’ s first term is fondly remembered in the investment community , largely because of its tax cuts and deregulatory policies . But in that era interest rates were near zero and federal budget deficits were , well , only about $ 900 billion . Deficits today are running at about $ 1.9 trillion , or double those of 2019 , while stock prices , interest rates and inflation are much higher .
That ’ s squeezing traditional avenues of wealth creation . Five years ago , home ownership in America was affordable . Now it ’ s out of reach for most young Americans who can ’ t afford big down payments . And that was before natural disasters in Florida , California and North Carolina exacerbated a national home insurance crisis .
Phil Orlando , chief market strategist at Federated Hermes , expects the S & P 500 to finish 2025 at about 7,000 , but he also thinks a correction after the previous two years would be healthy . He also says there could be a reversion to a less concentrated market : After the so-called Magnificent 7 tech stocks outperformed for so long , the so-called Forgotten 493 other stocks in the S & P 500 will start catching up , a phenomenon that began in mid-2024 and is likely to continue into 2025 .
Orlando noted in early January that the Magnificent 7 had climbed about 130 % over the last two years after OpenAI unveiled ChatGPT while the Forgotten 493 rose by only about 20 %. There was some logic behind this divergence . Most Mag 7 companies posted spectacular earnings gains . Nvidia ’ s 2024 profits exceeded its 2023 sales , an unheard-of feat for a 30-year old business . Other tech giants enjoyed big profit gains , and as a group the Mag 7 posted 62 % earnings gains in 2023 ’ s fourth quarter and 52 % in 2024 ’ s first quarter , Orlando says .
Over the next few years , he expects them to “ normalize ” in the 10 % to 15 % area . A host of tech companies , not just the Mag 7 , have enjoyed huge run-ups in their stock prices built on the promise of AI , and Wall Street is now demanding to see revenues ( if not profits ) that justify all the hype and spending ( Microsoft says it will spend $ 80 billion this year ). So far , some companies like Adobe have disappointed investors and more letdowns are inevitable .
“ The problem is the multiples of the Mag 7 names got a little frothy ,” Orlando says . “ We think we ’ ll see a little contraction , particularly given inflation and interest rates .”
In contrast , the Forgotten 493 saw their earnings drop in the third quarter of 2023 , and many have struggled in the quarters since . By the fourth quarter of 2025 , most of these companies will have earnings that look a bit better next to tech giants making massive capital expenditures . Orlando and his staff estimate that profits for the Forgotten 493 could rise about 15 %.
For some strategists , the renewed focus on deficits among bond buyers is overdue . “ I don ’ t see them as bond vigilantes ,” Hooper says . Bond investors are “ more like guardian angels .”
KRISTINA HOOPER Chief market strategist , Invesco
Yet optimists expect to see a big payoff from AI in terms of profits for tech companies and productivity gains for the broader economy . One of Wall Street ’ s leading bulls is market strategist Ed Yardeni , who labeled the decade the Roaring Twenties back in the depths of the 2020 pandemic and was predicting a productivity boom even before AI emerged on the scene .
After Trump ’ s election in November , Yardeni called for the S & P 500 to hit 7,000 by the end of 2025 and 10,000 by 2030 . Late last year , Yardeni raised his earnings estimates for the S & P 500 from $ 275 per share to $ 285 for 2025 and from $ 300 to $ 320 for 2026 .
As the year begins , President Trump is the major wild card , and that ’ s the way he likes it . Always the dealmaker , he believes uncertainty works to America ’ s advantage given its position as the world ’ s leading superpower .
Strategists are unsure about whether he is using tariffs as a negotiating instrument to extract concessions from our trading partners or whether he instead sees tariffs as a funding mechanism to raise badly needed revenues to address the bloated federal
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