There have already been many stock market predictions as we hit the middle of 2025’s first month, but uncertainty remains.
Last year, the FTSE 100 delivered returns of 7.1%, supported by sectors like finance, aerospace and defence. The FTSE 250 lagged at only 5.9% due to limited international reach. In the US, the Nasdaq Composite returned 32.7% with the S&P 500 returning 26.9%.
Several major events shaped the markets last year, including geopolitical tensions and falling interest rates. Initially, the high interest rate environment drove UK property and finance stocks up while retail and fashion suffered.
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But as the year came to an end, growth tapered off.
So where’s the FTSE heading now?
With equities trading at a 40% valuation discount, projections suggest the UK could be the third fastest-growing economy in 2025. Pension reforms and higher inflation could help drive growth.
The Bank of England expects moderate economic growth of 1.5% but not everyone agrees. Economists at Goldman Sachs project growth of 1.2%, slightly below the 1.3% average of those surveyed by Bloomberg.
Major Swiss bank UBS expects the FTSE 100 could end the year around 8,200 points. That’s barely any change from current levels. Others are more positive, with Capital Economics eyeing a year-end rise to 9,000 points — a 10% increase.
Looking around, 8,500 points seems to be the average from most analysts.
In contrast, Wall Street analysts expect the S&P 500 to rise by 14.8% on average in 2025.
UK stocks to watch
After ending 2024 down, both BP and Vodafone are two major stocks tipped for a recovery in 2025. As demand for premium spirits improves, Diageo may also return to growth.
Legal & General has been noted as an option to consider for risk-averse investors. ITV has been tipped as a potential takeover target and major construction firm Ashtead may move its listing to the US.
With interest rates looking stubborn, bank stocks are also getting attention. Shore Capital recently reiterated Buy ratings for Barclays and HSBC (LSE: HSBA). With a broad international reach, the latter is in an interesting position but it must play its cards right to keep everyone happy.
A beneficial split
Last year, HSBC announced a split between its East and West divisions to cut costs and reduce administrative issues. But with tensions rising between the US and China, there could be more to the strategy. If Trump’s planned trade tariffs create further division, an administrative divide may be beneficial.
It also announced a $3bn share buyback programme to reaffirm its commitment to shareholders (and possibly quash any jitters about the split). There’s still a risk the plan will backfire or fail to serve its purpose. If so, HSBC could find itself torn between major powers if relations between the East and West erode further.
But for now, it looks to be on the right track. Despite solid growth in the past year, it maintains a low price-to-earnings (P/E) ratio and an attractive 6% dividend yield. To my mind, that’s make it worth considering as part of an income portfolio in 2025.
As always, interest rate policies, inflation trends and global events will be key areas to watch as the year progresses.
