Stocks have struggled to start 2025. Uncertainty over President Trump’s tariff policy has put investors on edge. Recent economic data has surprised to the downside. Not even the best year-over-year corporate earnings growth in three years has been able to lift stocks out of their slump.
With the S&P 500 (^GSPC) essentially flat on the year and about 5% off its all-time high, strategists argue a rebound in the economic growth story is key to the major index climbing higher.
“We believe an improvement in the US economic growth outlook will be required to fully reverse the recent equity market weakness,” Goldman Sachs US equity strategist David Kostin wrote in a note to clients on Friday.
The recent market sell-off has been headlined by a sell-off in many of the “momentum” stocks of the past several months. Momentum stocks are typically defined as a group of market winners that keep moving higher. Some of this year’s momentum leaders, like Meta (META) and Palantir (PLTR), have lagged in recent weeks amid the market’s tumble. Other highfliers from the past several years, like Nvidia (NVDA) and Tesla (TSLA), have also stumbled out of the gate in 2025.
Kostin’s team has seen its momentum factor sell off by 5% or more in a one-week period nine times since 2021. And while not all of the stocks in a momentum basket would necessarily be tied directly to economic growth, Kostin notes that each time such stocks sold off since 2021 “subsequent S&P 500 returns were typically dependent on whether the market’s pricing of economic growth improved or deteriorated.”
Broadly, economic data has shown weaker growth than Wall Street expected, challenging a key piece of the bull case for stocks. Many strategists expected the US economy to grow at a solid pace of roughly 2% or higher in 2025. Instead, the data has led to a sharp downward revision to economic growth forecasts for the first quarter.
Monday’s market slump epitomized this action as readings on manufacturing activity and construction spending were weaker than expected. All three major averages reversed course following the data releases before heading firmly lower later in the afternoon as President Trump reiterated his intention to place tariffs on Canada, Mexico, and China.
In a research note to clients on Sunday night, Morgan Stanley chief investment officer Mike Wilson noted that “growth (both economic and earnings) is now the prominent driver of equity indices.”
In a video sent to clients on Friday, Piper Sandler chief investment strategist Michael Kantrowitz listed a “growth scare” as one of the key reasons stocks have been in a slump and added that “if we get better economic data that helps.”
