Brian Belski’s Top 5 Calls for 2025

Third year of the bull market

It is no secret that equity markets have had a tremendous two-year run. U.S. stocks in particular outperformed all other asset classes in both 2023 and 2024, and we now find ourselves on the cusp of the “third-year” of the bull market.

Indeed, third-years have an interesting history: while returns tend to moderate relative to the first two, annual performance typically remains positive. Yes, we are entering a period of normalization, but negativity should not become the default position as a result. Growth remains very much on the table. In fact, the only bull market in the past 50 years that stopped in its third year was the pandemic—all other instances saw further equity gains.

S&P 500 Performance Comparison by Bull Market Year

Source: BMO Capital Markets Investment Strategy Group, FactSet.

Against this backdrop, we want to follow our 2025 Year Ahead Report—which was originally published in November—with key predictions for coming months.

#1 – S&P 6,700

This year we have set an S&P 500 target of 6,700 with an earnings per share (EPS) of $275 USD. While the forecast is conservative, we’re positioned to under-promise and over-deliver. We believe financial sector earnings will provide fuel for returns and we’ve been encouraged to see strong earnings in January from the likes of Bank of America, JP Morgan, Morgan Stanley and Wells Fargo. On the overall target of 6, 700, we reserve the right to adjust as new information comes to light, as we did in 2024. Last year was the only time in my 35 years of investment management that we increased our annual target twice. That’s number one.

Number two: in an election year we typically publish our targets earlier, which puts us at a disadvantage relative to the rest of the street. Yet we managed to perfectly call the 6,100-year end for the S&P 500 based on our second revised target, because we would rather be responsive to new data than dig in our heels in the face of changing circumstances.

#2 – TSX 28,500

Although we continue to hear noise about Canada’s economic woes, our target for the year is 28,500 and $1,600 earnings per share. To the bears, we simply say this: we are investors. We do not base our analysis or strategy on macroeconomics. Too many Canadians believe that if the real economy struggles, the stock market must too. Take a look at the 12-month price charts for Aritzia Inc. (ATZ.TO) or Dollarama Inc. (DOL.TO) and the answer might feel different, which is precisely why we choose to invest in companies rather than the broad market. High quality stocks can thrive in any environment.

Moreover, no one truly knows what the economic numbers will be until all of the revisions have been completed, which typically happens two to three months later. I often like to say, “economists are like weathermen, they are paid to be wrong.” Tariffs is another concern that we hear in our meetings. Once again, this is a macro story. If you are an investor, it should not impair your ability to see the businesses that are positioned find a profit amidst a burgeoning trade war.

#3 – Shift to small caps

Investing decisions often come in the form of complex analysis, but some instances can boil down to simple math. For instance, Small and Mid Cap equities are heavily discounted relative to the largest cap stocks on the S&P 500 Index. A regional banking crisis in March 2023 stoked fears about investing in companies with smaller market capitalization, leading to a relative valuation gap that has SMID-Cap companies poised for a renaissance.

While earnings growth has been a challenge, many of these companies look attractive when viewed through fundamental lens. These are generally stable businesses that pay dividends and can weather the occasional down period. Yes, growth rates fell sharply after the pandemic-era stimulus wore off, but the data shows earnings-per-share (EPS) growth has typically recovered after similar dips. Many analysts are aware of this dynamic, which explains their next twelve-month (NTM) expectations have improved throughout the past year.

Relative Blended EPS Growth

Source: BMO Capital Markets Investment Strategy Group, FactSet. Average of LTM & NTM EPS growth.

NTM EPS Growth

Source: BMO Capital Markets Investment Strategy Group, FactSet.

Also, some investors mistakenly believe the outperformance of the Magnificent Seven is representative of the broader Large Cap category. Our analysis shows that the largest equities in the S&P 500 typically lag the index. In fact, the best average relative performance from the benchmark comes from the smallest 60% of stocks, which means there are opportunities hidden among the smaller, lesser-known names.

Mega-cap equities like Nvidia and Microsoft have indeed outperformed on a relative basis and, as a consequence of their size, pulled the benchmark with them. However, the S&P 500 still produces relatively strong average year-over-year returns when those equities underperform, proving that momentum does not solely hinge on the largest market cap stocks.

#4 – Overweight Consumer Discretionary & Financials

We are improving our outlook on Consumer Discretionary by moving from Market Weight to Overweight, although selectivity remains a key tenet of our approach. We want to focus on the best-in-brand retails while maintaining exposure to the two sector giants (Amazon and Tesla) in order to cover off risks related to consumer spending. Valuations have been compressed in the sector owing to weak earnings and an uncertain macro environment; however, the worst may have passed. Our models show earnings revisions may be at an inflection point, which, given the sector’s underperformance, could catalyze sentiment in a positive direction.

Consumer Discretionary: Relative Valuation & Performance

Source: BMO Capital Markets Investment Strategy Group, FactSet. ValComp: average z-score of P/E, NTM P/E, P/B, P/S, and inverted DY.

Revision Composite: Consumer Discretionary

Source: BMO Capital Markets Investment Strategy Group, FactSet. % of upward to total revisions prior 60 days; average of FY1 & FY2.

Meanwhile, on Financials, we want to maintain our Overweight rating. Our conviction on this sector has not wavered despite the interest rate uncertainty, and recent earnings have demonstrated the type of strong earnings growth that we believed was possible. Regional banks were largely left for dead after the events in March ’23, but we believe the regulatory environment has now shifted back in their favour and performance could follow as well.

#5 – Downgrading Healthcare to underweight

President Trump was sworn in as the 47^th president on January 20 and he quickly moved to implement change. Healthcare remains a vulnerable sector, in our view, given President Trump’s views on vaccines and his potential nominees for the Department of Health and Human Services. Valuations already reflect a certain amount of pessimism, but any prospect of an earnings-led rebound are now in doubt.

Granted, Eli Lilly still had a fantastic year in 2024 and we continue to own it in multiple portfolios. However, we are worried about one-product stocks, because what Lilly is to the current weight-loss drug trend is similar to what Pfizer was to the vaccines. That amount of revenue concentration is concerning given the fickle regulatory environment. At the moment, we would rather pivot to defensive areas such as Healthcare Providers that offer consistent growth properties and choose judiciously in high-growth corners such as Biotechnology.

Conclusion

In 2024, the prevailing theme was Will Ferrel’s catchphrase from the movie Jackie Moon: “Everybody love everybody!” Markets were brimming with optimism, and there was no reason to constrain your allocation to Growth or Value or Large Cap—alpha could be found by owning every part of the market. This year could be different.

The biggest challenge for 2025 will be maintaining a core large cap technology exposure while diversifying away from the Magnificent Seven. Long-run secular trends around artificial intelligence, for example, remain unchanged. We are still bullish on those macro themes, but want to find opportunities where we can, at more attractive entry points.

Please contact your BMO Global Asset Management wholesaler for any additional support and guidance.