Equity Market Mid-Year Review: What drives long-term growth?

7/1/2025

After a bumpy start to the year, the market has climbed back to new all-time highs, leaving many investors wondering if we’re entering uncharted territory once again. This makes it the perfect time to revisit the long-term forces that drive the U.S. equity market and to consider the reasons to stay invested.

Robust Household, Retirement Demand and Demographics

U.S. households are the largest equity holders, directly owning 38% of stocks, and exert growing influence through mutual funds and ETFs. Notably, the wealthiest 10% control 87% of household equity holdings, driving demand from investors who typically hold stocks long-term.

Today, households allocate a record 49% of their financial assets to equities—surpassing levels seen during the dot-com bubble. Retirement savings are a major force behind this trend, as the shift from pensions to self-directed plans like 401(k)s fuels steady inflows. Total 401(k) assets now stand at $8.9 trillion, with average equity allocations of 71% and younger investors often allocating up to 90%. Annual contributions generate around $500 billion in new equity demand, helping stabilize markets despite volatility.

Demographics also play a role. Millennials are entering their peak investing years, while older generations maintain significant retirement assets in stocks. Compared to other regions, U.S. households’ 49% allocation far exceeds that of Japan (13%), the Euro Area (10%), or China (9%), providing critical support for the market.

Corporate Buybacks and the “TINA” Effect

Corporations are another major source of equity demand through share repurchases, projected to reach $675 billion in 2025. By reducing share count, buybacks boost earnings per share and support valuations. Many cash-rich firms, especially in technology, continue this practice despite higher interest rates, reinforcing market strength.

Additionally, the “There Is No Alternative” (TINA) mindset has supported equity allocations for years. While interest rates have risen since 2022, stocks remain attractive thanks to their earnings growth potential, inflation-hedging features, and relative appeal over bonds.

Earnings Growth and Innovation

While structural demand helps cushion market volatility, the ultimate driver of long-term market direction is corporate profitability. The U.S. continues to lead globally in innovation, with technology making up about 32% of the S&P 500. Sectors like AI, biotech, and clean energy—backed by R&D spending equivalent to roughly 2.9% of GDP—are supporting productivity gains and contributing to earnings growth.

U.S. corporate earnings remained solid in the first quarter, with S&P 500 companies posting 13% year-over-year EPS growth. In contrast, Eurozone firms saw more modest growth of around 3% over the same period. However, forward estimates point to a moderation in earnings momentum, with Q2 S&P 500 EPS growth expected to slow to around 5% year-over-year. This reflects a more uncertain environment as companies face higher input costs and moderate consumer demand.

Conclusion

Understanding these long-term drivers helps investors stay focused on what really matters—systematic demand and earnings growth. But staying invested doesn't mean ignoring risks. Valuations remain elevated by historical standards, and earnings growth may become uneven as economic conditions evolve.

That’s why we’re focused on the macro and policy factors that matter most: employment trends, consumer spending, inflation, interest rates, corporate earnings, and global competition in key industries. These forces will determine whether the market remains resilient or turns volatile. A well-diversified portfolio is essential to help navigate whatever lies ahead.

Source: Goldman Sachs

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