Last June, many stock analysts predicted that the stock market would end 2025 with no real gains.
At the time, several prominent forecasters projected that the S&P 500 index would close the year in a range between 5,600 and 6,100. The S&P had started the year around 5,900 points.
When a turbulent 2025 finally ended, the S&P closed at 6,845.5, up more than 16%.
That was great news for stock owners. But it also raised some questions in retrospect: How could so many forecasters have been so far off from where the market was headed? What changed between June and December?
To answer them, let’s go back to early 2025.
The S&P had ended 2024 at 5,881.6, closing a spectacular year in which the index rose 23%.
In a typical year, stock forecasters “tend to pack gains of around 5% to 10% into their year-end forecasts,” said Jeffrey Buchbinder, chief equity strategist at LPL Financial.
The stock gains about 10% in an average year. So, all things being equal, a year-end forecast in the 5% to 10% range probably isn’t too far off.
LPL Financial forecast that the S&P would end 2025 between 6,275 and 6,375, gaining approximately 7% to 8%, according to a Jan. 1 Bloomberg stock market forecast summary. Bank of America predicted, rather ominously, that the S&P would end the year at 6,666. JPMorgan Chase put the figure at 6,500.
But many of those forecasts changed dramatically after President Donald Trump’s so-called “Liberation Day.” On April 2, Trump announced a universal 10% tariff on all imports, with additional import taxes for many countries, which the president displayed on a large board.
By April 8, the S&P had plummeted below 5,000, down nearly 20% from its all-time high two months earlier.
“Investors sold first and asked questions later,” said David Meier, senior investment analyst at The Motley Fool.
Traders feared that Trump’s tariffs would lead to runaway inflation and stop consumers from spending. They also feared the unknown: American tariffs had not been this high in more than half a century.
“The tariff rates I had in mind were essentially ridiculous,” Meier said. “I mean, they were very high but they had no real justification. Therefore, the market reacted, in my opinion, in a perfectly rational way.”
A week after Liberation Day, Trump suspended most of his “reciprocal” tariffs and reduced them again to 10%. The stock market skyrocketed.
“The worst-case scenario after Liberation Day did not come to pass,” said Eric Teal, chief investment officer at Comerica Wealth Management.
But uncertainty persisted and the S&P would not hit a new record until late June.
It was during those spring months that stock market forecasters lowered their projections and reframed 2025 as a lean year.
Analysts still widely believed that Trump’s tariffs would spike inflation and hamper spending. They feared a recession.
“I think the analysts had a hard time assessing that uncertainty and ended up being too conservative,” Buchbinder said.
The worst fears did not come true. The annual inflation rate in the United States has never exceeded 3%.
Dire predictions about tariffs and inflation assumed that American consumers would be hit hardest by those taxes.
That didn’t happen. According to a study by the National Bureau of Economic Research, only about 20% of Trump’s tariffs “passed through” to consumers. As imported goods traveled from their country of origin to American retailers and consumers, the tariff impact was softened at each stop.
“That inflation never really showed up,” Buchbinder said. “The companies did a very good job managing it. Our business partners ate some of it.”
Another factor holding back stock market predictions for 2025 was the prospect of an AI bubble.
Throughout that year and this year, Wall Street observers have debated whether the stock market has entered “bubble” territory: in this case, a surge in technology stock prices, driven by outsized expectations about artificial intelligence.
Perhaps the best evidence of a bubble is in the relationship between stock prices and corporate profits, which are at an all-time high.
The price-to-earnings ratio tells you whether a stock is overvalued. A common yardstick, the cyclically adjusted price-to-earnings ratio, or CAPE ratio, stands at 40.42 for the S&P 500, as of January 21.
That metric was higher only once before, at the peak of the dot-com bubble in 1999-2000.
Investor surveys suggest stock owners know all about the AI bubble. They keep buying AI stocks anyway.
In a recent survey by The Motley Fool, 93% of investors in AI stocks said they plan to maintain or expand those investments over the next year. Only 7% plan to reduce their AI holdings.
Investment in AI “exceeded everyone’s expectations” in 2025, and corporate profits were higher than expected, Buchbinder said. Those trends drove up stock prices.
So what do stock market forecasters expect in 2026?
LPL predicts the S&P 500 will end the year at 7,400, a gain of 8%. Comerica Wealth has the same goal. Wells Fargo Investment Institute has a year-end target of 7,500, a gain of nearly 10%.
The biggest obstacle to those projections could be the impending midterm elections: Midterm elections tend to go badly for the party in power, creating potential volatility.
“We’ve really emphasized playing defense this year,” Teal said.
On the positive side, investors may feel growing confidence in the president’s economic pragmatism.
One lesson of Liberation Day, for many economic observers, was Trump’s sensitivity to stocks. Their April 2 tariffs lasted a week. At other crucial moments in his second administration, Trump has reversed policy decisions that sent the stock market reeling.
For stock traders, that’s a welcome trend.
“The president, given enough time, really cares about the markets,” said Sameer Samana, head of global equities and real assets at Wells Fargo Investment Institute. “That seems to be your report card.”
This article originally appeared on USA TODAY: Stocks Beat Their Target in 2025. Here’s What to Expect in 2026.