- The S&P 500 will hit 6,700 next year, according to BMO's chief investment strategist.
- The stock market is entering the third year of a cyclical bull run, Brian Belski said.
- He sees strong earnings growth and lower interest rates boosting the market.
Don't bet on an S&P 500 stumble next year, as BMO Capital Markets sees more upside to come.
The benchmark index is headed for a 6,700 level by the end of 2025, according to BMO chief investment strategist Brian Belski. That marks a nearly 14% increase from current levels.
There are three reasons to anticipate this outcome, he told CNBC on Monday.
First, the stock market is entering its third year of a cyclical bull rally. Since 1950, a cyclical bull year typically equates to a 6% gain for the index, Belski said.
Across the current bull cycle, the stock market has scored signficantly larger annual gains than history would suggested. The S&P returned 24% in 2023 and is already up around 23% year-to-date.
Second, Belski reasoned that the index will notch more than just a 6% appreciation, as earnings growth is understated.
Some anxiety has mounted that the stock market has become too expensive, with valuations hovering at near generational highs. According to recent comments from BlackRock's bond chief Rick Rieder, earnings growth will need to rise significantly for stock market multiples to come down.
This will happen, Belski said, and also predicted that the market will continue broadening out away from a heavy focus in a few leading names. This has been a concern, given that just a handful of tech names account for roughly a third of the S&P.
"We see the broadening out effect to be real," Belski said, later adding: "You take a look at the other 490 stocks in the S&P 500, their earnings growth is expanding a lot faster."
Third, markets will continue responding to easing monetary policy.
"If you look at monetary policy and fiscal policy, that's what really drives markets, and the train has left the station with respect to monetary policy becoming more loose," he said.
The Federal Reserve has so far cut interest rates twice since September, and investors indicate a 65.3% chance of another quarter point cut in December, CME FedWatch Data shows.
Though the market is less sure on how far interest rates can fall under president-elect Donald Trump's policies, Goldman Sachs predicted that the federal funds rate will drop over 100 basis points to a 3.25%-3.5% range next year.
BMO's prediction is a rung above other forecasts. On Monday, Morgan Stanley updated its 2025 S&P target to 6,500, citing that high quality cyclical stocks will outperform.