Why the S&P 500’s record highs could continue in 2025

The S&P 500 is once again approaching record territory, driven by strong corporate earnings, easing inflation, and the ongoing boom in artificial intelligence (AI).

As of mid-May 2025, the index sits just 3% below its all-time high of 6,144.15, set in February. This resurgence has led analysts to revise their forecasts, with UBS recently raising its year-end target to 6,000, citing stronger-than-expected earnings and improved GDP growth projections.

What’s fuelling the recovery?

A marked increase in corporate earnings is the most significant driver of the market’s recovery. In the first quarter of 2025, S&P 500 companies reported a blended year-over-year earnings growth rate of 13.6%, surpassing the five-year average of 11.3%. This marks the second consecutive quarter of double-digit earnings growth.

Notably, sectors such as Health Care, Communication Services, and Information Technology led the charge, with the Health Care sector reporting a remarkable 43% increase.

Looking ahead, analysts anticipate this trend to continue, with projections of a 14% year-over-year increase for 2025. And the optimism is not unwarranted — there’s strong evidence of sustained economic expansion from productivity-boosting technological developments like automation.

AI is once again at the forefront

The AI phenomenon continues to play a significant role in US market activity. Companies like AI-chip makers Nvidia and Broadcom remain at the forefront, with their performance closely watched by investors. Naturally, the ‘Magnificent Seven’ — tech giants including Apple, Microsoft, and Alphabet — have been core drivers of the S&P 500’s gains.

It’s now clearer than ever that investor confidence in the sector has not waned.

AI-enhanced automation will likely continue to be integrated across various industries, leading to enhanced efficiency and new revenue streams. The resultant boost in corporate earnings could, by extension, help drive even greater market growth.

An S&P 500 leader to watch

The AI-driven analytics firm Palantir (NASDAQ: PLTR) is a good example of an S&P 500 stock worth considering in 2025. It’s up a massive 65% since the beginning of April, after bouncing off a yearly low of $74. It made a new record high on 14 May and is currently the second-best performing stock on the S&P 500, slightly behind Texas energy firm NRG.

Known for its advanced data analytics and AI platforms, the company is capitalising on surging demand from both government and commercial clients seeking to integrate artificial intelligence into decision-making. In Q1 2025, it posted its sixth consecutive quarter of GAAP profitability and a 21% year-over-year revenue increase, driven largely by its popular Foundry platform.

The company is also aggressively expanding through higher-value contracts and pushing for more international adoption.

But, as is common for tech giants, it trades at a notable premium — around 55 times forward earnings. This high valuation leaves little room for error — any earnings miss or slowdown in growth could trigger a sharp correction. Another concern is concentration risk: most of Palantir’s revenue comes from a small number of large government contracts, particularly with US defence and intelligence agencies. Delays or cancellations in these contracts could hurt its revenue and share price.

But this doesn’t appear to have swayed investor enthusiasm, likely because of its strategic position at the intersection of AI, defence, and enterprise software. The company’s success is a good example of how the AI narrative extends far beyond semiconductor stocks like Nvidia.

The post Why the S&P 500’s record highs could continue in 2025 appeared first on The Motley Fool UK.

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Suzanne Frey, an executive at Alphabet, is a member of The Motley Fool’s board of directors. Mark Hartley has no position in any of the shares mentioned. The Motley Fool UK has recommended Alphabet, Apple, Microsoft, and Nvidia. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.