Investing.com

Analysts at Capital Economics stated in a research note on Monday that they are maintaining their 2025 year-end forecast of 7,000 for the S&P 500, despite last week's decline after the FOMC meeting.

> "We are sticking to our forecast that the S&P 500 will end next year at 7,000," the firm declared.

This forecast persists even though they believe that “Fed policy will be a bit less accommodative” than previously anticipated.

The firm pointed out that the S&P’s decline last week seems to have been influenced by a significant sell-off in the government bond market.

> "All else equal, this makes sense,” said Capital Economics. “Nonetheless, our view is that the 10-year TIPS yield, which is typically used as a proxy for this risk-free component because equities are real assets, won’t end next year higher than it is now.”

Capital Economics further emphasized that the outlook for the S&P 500 “doesn’t just depend on what happens to the risk-free component of its earnings yield.” They noted that the relationship between the S&P 500 and its forward twelve-month (FTM) earnings yield has diverged since late last year.

This is attributed to the rapid growth of the S&P 500 FTM earnings per share, which has propelled the index higher, irrespective of changes in the FTM earnings yield, alongside a significant drop in the FTM equity risk premium (ERP).

> “We suspect that S&P 500 FTM EPS will continue to grow a bit next year,” stated the firm. “We also envisage the index’s FTM ERP shrinking further then, even though it’s already quite low.”

The analysts concluded that the FTM ERP is still well above the lowest point it reached before the dot-com bubble burst, marking the last period of significant growth in the US stock market due to excitement over transformative technology.