Wall Street's 2025 stock market forecasts are falling apart for one simple reason

Monday’s market meltdown coincided with a major shift in how Wall Street is thinking about the health of the US economy and the current bull market run.

“You’re seeing a complete upending in virtually every single consensus trade that was common at the beginning of the year, everything in stocks, in bonds, in currencies,” Queens’ College, Cambridge, president and former PIMCO CEO Mohamed El-Erian told Yahoo Finance on Monday.

“We’ve had a complete upending of the conventional wisdom.”

After two consecutive years of strategists chasing the market higher as the US economy outperformed expectations, consensus entered 2025 positioned for another year of above-trend growth in the US economy.

Now, economic growth forecasts are moving lower, and strategists are discussing the likelihood that their year-end targets for the S&P 500 might’ve been too optimistic.

“We have seen the US equity market on a rocky path higher through year-end, and have believed that our 6,600 can absorb a 5-10% drawdown,” RBC Capital Markets head of US equity strategy Lori Calvasina wrote in a note to clients on Sunday.

“The risks of a drawdown of more than 10% have admittedly grown, however. If that occurs, we see a ‘growth scare’ of a 14-20% decline from peak as most likely, which could shift us into our bear case.”

In recent weeks, economic forecasting teams from the likes of Morgan Stanley, Goldman Sachs, and others have moved their 2025 GDP projections lower — Morgan Stanley now forecasts 1.5% growth in 2025, and Goldman sees 1.7%.

‘A period of transition’

Wall Street’s view of where the economy could be headed this year is not out of step with political consensus, either.

Which may be part of what’s been bothering investors of late.

Last week, President Trump told Congress there could be “a little disturbance” to the economy from his tariff policies, but added, “we’re OK with that. It won’t be much.”

In an interview with Fox Business on Sunday, Trump said, “There is a period of transition because what we’re doing is very big … We’re bringing wealth back to America. That’s a big thing … it takes a little time, but I think it should be great for us.”

But signs of a slowing economy had already been brewing before Trump took office and will likely continue to muddy the economic picture regardless of how the president’s tariff plans evolve.

“The economy was slowing before Trump was sworn in,” Renaissance Macro head of economics Neil Dutta wrote in a note to clients on Monday. “He inherited an economy with deep imbalances and a frozen housing and labor market.”

Dutta points out that since the market’s last growth scare in August 2024, stronger economic data points have coincided with rising equity prices and vice versa. In recent weeks, however, “the economic and corporate earnings data have deteriorated,” Dutta wrote.

Read more: What is a recession, and how does it impact you?

Still, no major Wall Street firm is directly calling for an outright downturn in which GDP turns negative for two consecutive quarters. For financial markets, however, the rate and direction of the change in the economy’s growth rate, rather than the absolute level, is most important for setting prices today.

Research from Calvasina at RBC has shown that the two worst GDP environments for stocks are when the US economy grows at an annualized pace between 0% and 2%, suggesting the market’s most lackluster performances often come as investors price in the slowdown.

Once GDP is actually negative, stocks typically perform well as the rebound — not the slowdown — drives price discovery.

And just as economists aren’t yet calling for a recession, neither are equity strategists dramatically cutting forecasts for where stocks end the year, even with the median forecast of those tracked by Yahoo Finance calling for the S&P 500 to reach 6,600 by year-end, or about 17% higher than current levels.

“Our year-end 2025 base case price target remains 6,500, though the path is likely to be volatile as the market continues to contemplate these growth risks for the time being,” Morgan Stanley chief investment officer Mike Wilson wrote in a note on Sunday.

“This fits with our long-standing view that policy would likely be sequenced in a more growth-negative way to start the year before lower deficits/rates and less crowding out of the private economy benefit the market later in the year — No Pain, No Gain.”

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

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