Be prepared for weaker returns in 2025 after stocks posted huge gains over the past two years, says Wharton professor Jeremy Siegel

• The S&P 500 will record a maximum gain of 10% next year, said Jeremy Siegel.

• The Wharton professor believes returns on large-cap tech stocks could stagnate in 2025.

• But undervalued small- and mid-cap stocks would rise, he said.

The S&P 500 will be firing on all cylinders in 2025 after a scorching two-year rally, Jeremy Siegel told CNBC on Monday.

“I expect a much quieter year. “I mean, we’ve had two blockbuster years, 2023 and 2024, so I expect an S&P probably in the zero to 10% range,” the Wharton professor explained, adding that dominant tech stocks could see “flat” returns next year.

The benchmark S&P 500 is up 26.5% so far this year. Both U.S. and global investors drove double-digit gains, securing major companies’ exposure to artificial intelligence. This AI frenzy has driven a handful of tech companies higher, making S&P earnings heavily dependent on their performance.

But according to Siegel, the so-called Magnificent 7 stocks — which include names like Amazon, Nvidia and Meta — are starting to lag.

“We may see relative weakness at some point in the big high-flyers that have been so good for the market over the last two years,” he said, adding: “The S&P accounts for a third of those high-flyers if they falter next If the S&P runs higher in 2023 and 2024, it will be difficult for the S&P to achieve anywhere near the gains we saw in 2023 and 2024 have achieved.”

Bank of America suggested that technology trading could be heading towards a cyclical peak. Much will depend on future bond yields, as rising interest rates are likely to limit risk assets in 2025, the bank said.

Although the technology sector has been the big catalyst for the S&P 500 this year, the election of Donald Trump has contributed to even stronger gains in recent weeks.

Traders are betting the new president will implement market-friendly policies that boost overlooked assets like small-caps.

In fact, the small-cap Russell 2000 index has gained 7% since the Nov. 5 election as investors hope domestic companies will benefit from Trump’s deregulation and tax cut promises.

“Maybe next year Mag 7 won’t do anything, and these small and mid-cap stocks – which are really so undervalued compared to the others – will finally have their day in the sun,” Siegel said.

Some market observers are less confident about small caps’ ability to continue recovering. A Capital Economics note last month noted that small-cap stocks also rose sharply after Trump’s first election victory in 2016, but underperformed through 2017.

Read the original article on Business Insider