The year is almost over and it’s time to make some bold predictions for 2025.
In this article, three Motley Fool contributors draw on their experiences to predict what’s in store for the stock market next year. Here’s what they have to say about artificial intelligence (AI) software stocks., Ark Innovation ETFthe Beautiful Sevenand more!
Image source: Getty Images.
Jake Lerch (AI software stocks):My prediction is that 2025 will be the year of software stocks. Think about it: Hardware stocks were among the best performing stocks by 2024. Semiconductor companies like Nvidia, BroadcomAnd ARMPossess saw their shares skyrocket as demand for high-performance chips skyrocketed.
But now that the calendar is turning from 2024 to 2025, I predict that the stock market can start to shifting his focus from chip stocks to software stocks such as Sound dogAI And Palantir.
Indeed, a shift has already begun in recent months the stocks of application makers such as SoundHound and Palantir surpass semiconductor stocks such as Nvidia and AMD.
NVDA data by YCharts
Moreover, some of these software companies remain relatively small in terms of market capitalization. At the time of writing, SoundHound AI has a market cap of approximately $8 billion. That makes it a potential acquisition target for deep-rooted technology mega caps. Meta Platforms, for example, has more than $70 billion in cash at hand — more than enough to bring in tens of billions to SoundHound cash remaining.
But that’s what it is not only the starters that could benefit from the shifting focus to software. Digital advertising companies and digital Learning spaces could also benefit as trade show participants look beyond AI hardware and into some of its practical applications. Reddit is testing an AI-powered response tool that will help the company attract more users and advertising dollars. Learning app Duolingo goes beyond language learning by incorporating music and math lessons. These new lessons – powered by AI – will help Duolingo attract more users and subscribers.
In short, the everyday applications of AI are virtually limitless – and they are only just starting to be rolled out. Because of that, I predict 2025 will be the year when AI-powered software will shine brightly.
Will Healy(Ark Innovation ETF): Although many investors benefited from the latest bull market, the rally was not broad-based. Instead, most of the gains went to the top stocks. You can see this when you check the performance of the S&P500 over the past two years to that of the Russell 2000.
^SPX data by YCharts
This worked against Cathie Wood Ark Innovation ETF (NYSEMKT: ARKK)since most investments are not S&P 500 stocks. The ETF is up just over 20% this year, and all of that gain came after the US presidential election.
Fortunately for Ark Holdings, many of these stocks that were left behind by the current rally appeared to be coming off their lows of recent weeks. With interest rates falling and post-election optimism rising, this should bode well for Cathie Wood’s flagship ETF.
To see this, all you have to do is look at its assets. Only from the top 10 positions Tesla (NASDAQ: TSLA) And Palantir (NASDAQ:PLTR) are S&P 500 stocks. However, the recovery is now trickling down to non-S&P investments.
For example, its second largest holding company, Year (NASDAQ: ROKU)makes up more than 9% of the fund and seemed to miss most of the current tech rally. While Roku is still down more than 80% from its 2021 high, the stock is up more than 60% from its August low, an improvement that benefits the Ark Innovation ETF.
The improvement is greater for fourth place Roblox (NYSE: RBLX)which is approximately 6% of the Ark Innovation ETF. While that stock has stagnated since the 2022 bear market, it has doubled in value from its May low. The rally started even earlier for a stock that controls 5% of the fund. Robinhood Markets (NASDAQ: KAP)which is an increase of over 240% this year!
Such improvements are indicators that the tech rally has finally moved beyond the Magnificent Seven and other top stocks. As we enter 2025 and the rest of the tech sector finally begins to recover, a long-awaited recovery appears to be on the horizon for the Ark Innovation ETF.
Justin Pope (beautiful seven): Anyone with investment exposure to the Magnificent Seven shares, including Apple, Alphabet, Amazon, Metaplatforms, MicrosoftNvidia and Tesla have probably enjoyed the past two years. The Magnificent Seven represents about 32% of the S&P 500 index, so their widespread outperformance has helped carry the stock market.
My prediction for 2025 is that some of these names will run out.
These companies lead or compete in a handful of fast-growing end markets, including e-commerce, digital advertising, cloud computing, semiconductors, artificial intelligence (AI), robotics and more. If you’re investing for the long term, the Magnificent Seven should still be a winning choice.
However, some of these companies have risen so much that their valuations have become higher than those of the underlying companies, which could lead to a bad year for some big names in 2025. For example, Apple’s AI technology, Apple Intelligence, may not be the home base run that investors were hoping for. Yet the shares trade at 34 times earnings, despite analysts forecasting long-term growth of less than 10% annualized. That’s a pretty steep valuation.
Tesla has rebounded sharply since the presidential election but trades at 177 times earnings despite weak sales in its core vehicle businesses. Analysts estimate that Tesla will grow earnings 8% annually over the next few years, which isn’t nearly enough to justify such a high price-to-earnings (P/E) ratio.
Some Magnificent Seven names may survive next year. Alphabet and Meta trade at price-to-earnings ratios of 24 and 27, respectively. Meanwhile, analysts think they will each grow earnings at 16% to 18% per year over the long term. That’s a lot more growth at a better price than you get from Apple and Tesla.
The end result? Investors must pay close attention to the growth they achieve and the price they pay for it. Buying the Magnificent Seven indiscriminately has worked for two years, but that trend may soon come to an end.
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John Mackey, former CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool’s board of directors. Suzanne Frey, a director at Alphabet, is a member of The Motley Fool’s board of directors. Randi Zuckerberg, former director of market development and spokeswoman for Facebook and sister of Mark Zuckerberg, CEO of Meta Platforms, is a member of The Motley Fool’s board of directors. Jake Lerch has positions in Alphabet, Amazon, Duolingo, Nvidia, Reddit, Roblox and Tesla. Justin Pope has positions in Roku. Will Healy has positions in Roku. The Motley Fool holds positions in and recommends Alphabet, Amazon, Apple, Meta Platforms, Microsoft, Nvidia, Palantir Technologies, Roblox, Roku, and Tesla. The Motley Fool recommends Broadcom and Duolingo and recommends the following options: long January 2026 $395 calls to Microsoft and short January 2026 $405 calls to Microsoft. The Motley Fool has a disclosure policy.
3 Bold Stock Market Predictions for 2025 were originally published by The Motley Fool
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