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State Street Global Advisors expects stocks to continue rallying through 2025, building on what the firm says is only the fourth successful soft landing in U.S. history.

Boston-based State Street, the No. 3 ETF issuer with $1.5 trillion in assets, in its 2025 ETF Market Outlook draws parallels to the market surge that followed the 1995 soft landing when the S&P 500 delivered five consecutive years of returns above 20%. Similar conditions today, including planned Fed rate cuts and technological advancement, may spark another extended period of market gains, according to the report.

State Street's optimism comes as 2024 shapes up as huge year for investors, with the S&P 500 as measured by the S&P 500 ETF Trust (SPY) gaining 29% and ETFs pulling in more than $1 trillion in inflows for the first time. Markets have surged and jobs have been added as artificial intelligence and the financial industry boosts growth, the economy leaves behind the covid 19 years and the reelection of Donald Trump boosts expectations of a business-friendly White House that will cut regulations.

“Historically, economic growth has accelerated in the years following a soft landing. And that pattern is likely to repeat in 2025,” Michael Arone, State Street’s chief investment strategist, wrote in the outlook.

Looming Fed Rate Cuts Could Fuel Growth

Expected Federal Reserve interest rate cuts next year may unleash a wave of capital formation through increased IPOs, mergers and acquisitions and capital expenditures, Arone wrote along with Matthew Bartolini, Head of SPDR Americas Research and Senior Research Strategist Anqi Dong. State Street rate cuts of 0.75% to 1% next year from the current 4.5% to 4.75% federal funds rate.

The firm points to several tailwinds supporting its bullish view: resilient corporate profits with S&P 500 earnings projected to grow 15% in 2025; a healthy labor market with 2.1 million jobs added over the past 12 months; prices continuing to fall, with core PCE dipping to 2.8% from 3.2%.

State Street sees opportunities in U.S. small caps, regional banks and companies in artificial intelligence. The firm notes that small cap valuations appear attractive relative to large caps, trading at levels well below their 20-year average despite improved growth prospects.

However, the outlook warns that greater market volatility may be the price investors pay for faster economic growth, pointing to the tumultuous period that followed the 1995 soft landing. That era saw events like the Asian currency crisis and Russian debt default rattle markets even as stocks climbed higher.