Goldman Sachs Predicts 11% Stock Market Gain in 2025

Goldman Sachs, in its highly anticipated 2025 equity outlook, projects an 11% increase in stock prices, adding to the already robust gains of 2024. This prediction, which translates to a total return of 12% including dividends, is fueled by the firm’s projections of a healthy US economy, significant earnings growth, and modestly compressed price-to-earnings ratios. However, the firm also cautions about potential market volatility and risks stemming from various geopolitical and economic factors.

Key Takeaways: Goldman Sachs’ 2025 Market Outlook

• Bold Prediction: Goldman Sachs forecasts an impressive 11% increase in stock prices by the end of 2025, adding to the already strong performance of 2024.
• Earnings Growth Engine: This optimistic outlook hinges on projected earnings growth of 11% in 2025 and 7% in 2026, driven by a continuing expansion of the US economy.
• Sector Spotlight: Goldman recommends focusing on materials, software, and utilities sectors, alongside companies benefiting from AI monetization and those catering to small businesses.
• Cautious Optimism: While bullish on the overall market, Goldman acknowledges the market’s high valuation and warns of potential market volatility and risks, including possible tariffs and rising bond yields.
• S&P 500 Target: Goldman Sachs sets a new S&P 500 target of 6,500, significantly higher than the current levels.

Goldman’s 2025 Projections: A Detailed Look

Goldman Sachs’ optimistic 2025 forecast rests on several key assumptions. The firm’s equity strategy team, led by David Kostin, anticipates continued economic expansion in the United States, forecasting robust earnings growth of 11% in 2025 and 7% in 2026. This growth is projected to be fueled by improving profit margins, with Goldman estimating that net margins will expand by 78 basis points (bps) to 12.3% in 2025, followed by a further 35 bps increase to 12.6% in 2026. (Remember, 1 basis point equals 0.01%.) These projections contribute to their projected S&P 500 target of 6,500, a considerable jump from the current levels. The firm expects a forward P/E multiple of 21.5x at the end of 2025, only a slight compression from the current 21.7x.

A Note on Past Predictions and Market Performance

It’s worth noting Goldman’s past predictions for 2024. Initially, they were considerably more bearish, forecasting a mere 5% increase in the S&P 500, reaching 4,700. However, the market’s surprisingly strong performance throughout 2024, significantly exceeding their initial expectations, forced them to revise their forecast several times. The index ultimately far surpassed the initial projections, leading Goldman to issue revised predictions, ultimately settling at a year-end 2024 forecast of 6,000 according to the CNBC Pro strategist survey. This demonstrates the inherent volatility of the market and the challenge of accurately predicting future performance.

Navigating Potential Headwinds

While Goldman Sachs expresses confidence in its positive outlook, the firm acknowledges significant potential headwinds. The high current market valuations represent a key risk factor, as “high multiples are weak signals for near-term returns, but typically increase the magnitude of market drawdown during a negative shock,” the report states. Further, the report highlights “event risk” heading into 2025, specifically mentioning the potential threat of an across-the-board tariff and the potential risk from even higher bond yields as major concerns.

Goldman’s Investment Strategies for 2025

Given their projections, Goldman Sachs offers specific investment strategies for clients:

The “Magnificent Seven” and Beyond

The report reiterates the continued outperformance of the “Magnificent Seven”—Amazon, Apple, Alphabet, Meta, Microsoft, and Tesla—though it anticipates a narrower margin compared to previous years. In addition to these tech giants, Goldman predicts significant growth in merger and acquisition activity, forecasting a 25% jump in 2025. They highlight potential takeover targets like Zoom Video and Electronic Arts, among others, as promising investments.

Small Business Focus and AI Monetization

Goldman highlights the potential for companies that cater to the needs of small businesses. They specify Martin Marietta Materials, Waste Management, and Fiverr International as examples. Furthermore, Goldman emphasizes the importance of investing in companies well-positioned to capitalize on the monetization phase of Artificial Intelligence (AI). They suggest that companies such as Apple, Adobe, Mastercard, and Uber will likely outperform in this space.

Impact of Policy Changes

Addressing the potential impact of policy changes under the incoming administration, Goldman’s economists believe the effects of a lower corporate tax rate (15%) will largely offset the negative impacts of potential targeted tariffs on imported automobiles and goods from China. The report states: “Our economists assume the [incoming] administration will impose targeted tariffs on imported automobiles and select imports from China. They also assume a 15% corporate tax rate on domestic manufacturers. On net, the impact of these policy changes on our EPS forecasts roughly offset one another.“

Conclusion: A Cautiously Optimistic Outlook

Goldman Sachs’ 2025 equity outlook presents a cautiously optimistic picture of the market. While the firm anticipates strong growth fueled by a healthy economy and robust earnings, it also acknowledges the inherent risks and potential for volatility. Their recommendations emphasize diversification, focusing on companies within sectors poised for growth, and carefully navigating potential headwinds such as high market valuations and various geopolitical factors. Investors should approach this forecast with a balanced perspective, considering both the potential for significant gains and the realistic possibility of market corrections.