Which is a better investment: buying a home or investing in stocks?
Since 1995, stock prices have outperformed home prices by a factor of four, but which is actually the better investment for building wealth?
As of June last year, many stock analysts predicted that the stock market would end 2025 without making any real gains.
At the time, several prominent forecasters expected the S&P 500 to end the year in the 5,600 to 6,100 range. The S&P was around $5,900 at the beginning of the year.
When the tumultuous year of 2025 finally ended, the S&P rose more than 16% to close at 6,845.5.
That was good news for stockholders. But hindsight also raised the question of why so many forecasters were so far off the market’s direction. What changed from June to December?
To answer them, let’s go back to the beginning of 2025.
Stock forecasters predicted an average year of 2025
S&P ended 2024 at 5,881.6, capping off a great year with the index up 23%.
Jeffrey Bachbinder, chief equity strategist at LPL Financial, said that in previous years, stock forecasters “tend to expect a year-end increase of 5% to 10%.”
Stock prices typically rise by about 10% every year. So, all else being equal, a year-end forecast in the 5% to 10% range is likely not far off.
LPL Financial expects the S&P stock price to finish 2025 somewhere between 6,275 and 6,375, up about 7% to 8%, according to a Jan. 1 stock market forecast summary by Bloomberg. Bank of America, somewhat ominously, predicted that the S&P stock price would end the year at 6,666. JPMorgan Chase & Co. put the number at 6,500.
‘Liberation Day’ overturned those predictions
But many of those predictions changed dramatically after President Donald Trump’s so-called “Emancipation Day.” On April 2nd, President Trump announced that he would impose a flat 10% tariff on all imported goods and impose additional import taxes on many countries, which he posted on a large board.
By April 8, the S&P was below 5,000, down about 20% from its then high two months earlier.
“Investors sold first and asked questions later,” said David Meyer, senior investment analyst at The Motley Fool.
Traders feared that President Trump’s tariffs would create runaway inflation and cause consumers to cut back on spending. They were also afraid of the unknown. U.S. tariffs haven’t been this high in more than half a century.
“The tariffs he put on the board were essentially ridiculous,” Meyer said. “So the price was very high, but there was no justification for it. So, in my opinion, the market reacted completely rationally.”
After stock prices plummeted, President Trump suspended tariffs.
A week after Emancipation Day, President Trump suspended most “reciprocal” tariffs and returned tariffs to 10%. The stock market soared.
“The worst-case scenario after Emancipation Day did not materialize,” said Eric Thiel, chief investment officer at Comerica Wealth Management.
But uncertainty remains, and the S&P won’t reach a new all-time high until late June.
It was in the spring months that stock market forecasters scaled back their expectations and recast 2025 as a year of marginal gains.
Analysts still widely believe President Trump’s tariffs will cause inflation and hinder spending. They feared a recession.
“I think analysts had a hard time estimating that uncertainty and ended up being too conservative,” Buchbinder said.
The worst tariff scenario never arrived
My worst fears were not realized. America’s annual inflation rate never exceeded 3%.
Dire predictions about tariffs and inflation assumed that American consumers would bear the brunt of these taxes.
That didn’t happen. According to a study by the National Bureau of Economic Research, only about 20% of President Trump’s tariffs were “passed through” to consumers. The impact of tariffs was eased at every transit point as imported products traveled from the country of origin to U.S. retailers and then to consumers.
“That inflation never really showed up,” Buchbinder said. “Companies managed it well. Our trading partners ate some of it.”
So what about the “AI bubble”?
Another factor that dampened our 2025 stock forecast is the prospect of an AI bubble.
From that year to this year, Wall Street observers have debated whether the stock market has entered “bubble” territory. In this case, high expectations for artificial intelligence caused the prices of high-tech stocks to soar.
Perhaps the best evidence of a bubble is the ratio of stock prices to corporate profits, which is at a historically high level.
The price-to-earnings ratio indicates whether a stock is overvalued. The economy-adjusted price-to-earnings ratio (CAPE ratio), a common standard, was 40.42 for the S&P 500 as of January 21st.
The only time this metric was higher was during the peak of the dot-com bubble in 1999-2000.
Our investor research shows that stockholders are well aware of the AI bubble. They keep buying AI stocks anyway.
In a recent Motley Fool survey, 93% of investors who own AI stocks said they plan to hold or grow those investments over the next year. Only 7% plan to reduce their holdings in AI stocks.
Buchbinder said AI investments were “much higher than everyone expected” in 2025, and corporate profits were also higher than expected. These trends have caused stock prices to rise.
Where will stock prices go in 2026?
So what do forecasters expect from the stock market in 2026?
LPL expects the S&P 500 to end the year up 8% to 7,400. Comerica Wealth has set the same goal. Wells Fargo Investment Research Institute has put the number of deals at 7,500, nearly 10% higher than its year-end target.
The impending midterm elections may have the biggest impact on these predictions. Midterm elections tend to go poorly for the party in power, creating potential volatility.
“This year we’ve focused on defense,” Thiel said.
On the plus side, investors may feel more confident in the president’s economic pragmatism.
For many in the economy, one of the lessons of Emancipation Day was that President Trump has become more sensitive to stocks. His April 2 tariff lasted a week. At other key moments in his second administration, President Trump walked away from policy decisions that had spooked the stock market.
For stock traders, this is a welcome trend.
“A president who has enough time on his hands really cares about the markets,” said Sameer Samana, head of global equities and real assets at Wells Fargo Investment Institute. “It’s like his own report card.”
