We’re on the cusp of a new year. Time flies. It’s already a quarter of the way through this century. This is also the time of year when Wall Street prognosticators come out of the woodwork to issue “official” stock market predictions for the year ahead.
These experts are almost never right. And people rarely remember what they said by the end of the year. But financial institutions are expected to deliver a year-end forecast, and they have to say something.
This year the experts are a little more optimistic than usual. A roundtable of 14 major financial companies issued predictions ranging from positive 2025 returns of 5% to 15%. Of course, that’s not a stretch considering the average annual S&P 500 return is 11% since 1950. These predictions tend to be safe and mostly worthless.
Of course, predicting the future is a dicey business, especially when trying to nail down a specific block of time. Anything is possible. Remember the pandemic? But a new year is a specific and measured period that forces us to take stock of things and figure out where we are and where we might be going. That’s not a bad thing to do occasionally.
By most measures, 2025 looks pretty good for stocks.
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As inflation appears subdued, the Fed has begun a rate-cutting cycle that should last for the next two years. Historically, stocks do well when the Fed is cutting rates and there is no recession. And the economy has been solid. In fact, investors are more optimistic going forward since the election. Consumer and business confidence has soared to multi-year highs.
Corporate earnings are expected to be strong. Forecasts are for average earnings growth on the S&P 500 of 13.4% and 13.2% for the next two calendar years. It is also a good point in the cycle. This bull market is just 25 months old and has returned 65%. Bull markets usually don’t just run out of gas after two years. In fact, the average bull market has lasted 50 months and returned 152%.
Anything can happen. There is always an element of risk. And there are still two wars going on. But the biggest negative is probably valuation. Stocks are expensive. The S&P currently sells at 22.3 times forward earnings compared to an average of 16 times over the last twenty years. The market returned 26% in 2023 and about 28% with a little more than two weeks to go this year. It might be tough for stocks to deliver another consecutive year of 20%-plus returns.
Although bull markets don’t typically die of valuation, it may be that a lot of the easy upside is behind us. Stocks can still perform well, but they’ll probably have to earn it in 2025. For those reasons, I like stocks that will likely experience big earnings jumps in the new year. Here are two stocks that are still valued relatively cheaply and are expecting sizable profit rebounds next year.
2 Stocks Expecting Profit Rebounds in 2025
AbbVie Inc. (ABBV)
Yield: 3.8%
AbbVie Inc. (ABBV) is a U.S.-based biopharmaceutical company formed in 2013 as a spinoff from Abbott Laboratories. AbbVie is a research-based pharmaceutical company that specializes in small-molecule drugs. It’s a cutting-edge company with a terrific pipeline.
AbbVie became an industry giant because of its mega-blockbuster drug Humira. It’s an autoimmune medication that became the world’s bestselling drug with annual sales of $20 billion. But the tremendous success of that drug became a problem as Humira lost its patent overseas a few years ago, and it lost its U.S. patent in 2023.
Because of shrinking Humira sales, AbbVie posted lower year-over-year revenues in 2023 and most of 2024. But the company is turning it around. AbbVie has long planned for this eventuality and has done a stellar job launching new drugs.
AbbVie’s new immunology drugs, Skyrizi and Rinvoq, are expected to replace Humira’s peak revenues in a short period of time. In fact, management estimates that the combined revenue of these two drugs will be over $16 billion this year and $27 billion by 2027, far exceeding Humira’s peak sales.
This was supposed to be a tough year. Longer-term investors planned on enduring 2024 en route to greener pastures ahead. But ABBV is getting through this year in solid shape. It has returned over 12% YTD (as of 12-12). Looking ahead, management expects earnings to return to “robust growth” in 2025 and beyond.
The population is aging at warp speed. The main industry beneficiary of the aging population is healthcare.
AbbVie is a cutting-edge company with one of the very best pipelines of new drugs and treatments in the industry. The company is officially moving past the Humira patent expiration that has held the stock back for years. Imagine how the stock will perform without a patent cliff and with strongly growing sales.
Ally Financial Inc. (ALLY)
Yield: 3.2%
Ally Financial is the leading all-digital banking company in the U.S. with 3.3 million customers and over $100 billion in loans. The primary revenue source is automotive loans (over 70%) but it is also diversified in auto insurance, commercial lending, mortgage financing, and credit cards.
The company was the financial segment of General Motors (GM) where it developed a 100-year-old, fully developed auto loan business. It was spun off in 2009 during the financial crisis as part of GM’s bankruptcy reorganization. The company has since focused on the online business.
Ally can attract a large deposit base online because it can offer higher rates than traditional banks. It can do this because it is unburdened by the costs associated with physical branches and staffing. The bank has been able to add retail deposit customers for 62 consecutive quarters, including 57,000 in the third quarter.
Ally uses these deposits to make auto and other loans and has grown the business through online banking. That business is accelerating, and revenues have about doubled since 2017 from $5.8 billion to trailing 12-month revenue of $11.5 billion.
A big reason to buy ALLY now is because it’s cheap, despite the recent rally and the market at highs, ALLY sells at just 8.4 times forward earnings and 0.93 times book value, both valuations are well below those of the market averages. But there’s a reason ALLY is cheap.
Ally is highly leveraged to the auto market where things have been challenging. Consumers are strapped from inflation, and loan rates are still high. The dynamic has led to flattening sales and an increasing number of defaults. ALLY plunged over 20% in early September after the company disclosed that loan defaults were worse than expected.
But I believe the market overreacted and the selling is overdone. The current issues are just temporarily reducing growth but not killing profitability. Ally still grew revenue 6.9% and earnings were up 14.5% in the third quarter versus the year-ago quarter. Plus, things are likely to improve next year.
Interest rates are coming down. And the economic prognosis is improving. Next year looks good. In fact, analysts are expecting Ally to deliver 40% earnings growth for 2025.
To learn about the other stocks I like heading into 2025, consider subscribing to Cabot Income Advisor or Cabot Dividend Investor today.
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