Goldman Sachs 2025 US Stock Market Outlook: The expected 25-year return rate for the S&P 500 index is projected to reach 10%.

In the recent 2025 Global Equity Outlook research report by Goldman Sachs Research Department, it was pointed out that due to robust economic expansion and steady profit growth, the S&P 500 index is expected to rise for the third consecutive year. Chief U.S. equity strategist David Kostin wrote that by the end of 2025, the S&P 500 index is expected to rise to 6,500 points, with a total return rate including dividends of 10%. It is projected that earnings will grow by 11% in 2025 and by 7% in 2026. The Goldman Sachs Research Department indicated that corporate income growth (index level) typically aligns with nominal GDP growth, and their strategist's prediction of a 5% sales growth for the S&P 500 index is consistent with our economists' forecast of 2.5% real GDP growth and a decrease in year-end inflation to 2.4% next year. The incoming Trump administration is expected to introduce trade policies, including tariffs on imported cars and certain Chinese goods, as well as tax cuts for businesses. "These policy changes will roughly offset the impact on our earnings per share forecasts," Kostin wrote. The Goldman Sachs Research Department forecasts earnings per share for the S&P 500 index in 2025 and 2026 to be $268 and $288, respectively, in line with the median consensus forecast of $268 and $288. However, these prices are lower than the bottom-up consensus estimates of $274 and $308. Meanwhile, stock valuations are relatively high by historical standards, posing risks for investors. Over the past two years, the S&P 500 index's price-to-earnings ratio has increased by 25%. Currently, the P/E ratio stands at 21.7 times, at the 93rd percentile historically. Valuation for the index was at 17 times as of the end of 2022. Key risks for U.S. stocks next year Kostin wrote, "The stock market has been priced optimistically against a backdrop of high valuations, bringing risks in 2025." He believes that high P/E ratios do not necessarily indicate a signal for recent returns, but when negative shocks occur, high initial valuations typically exacerbate market downturns. Based on Goldman Sachs' macroeconomic fundamental assumptions, economic and earnings growth will continue in the coming years, with bond yields remaining near current levels. However, there are still many risks in 2025, including the potential impact of comprehensive taxation and the possibility of rising bond yields. On the other hand, a more favorable fiscal policy or a more moderate Fed policy mix could lead to higher returns. Kostin suggests that investors take advantage of low volatility periods to capture stock market upswings or hedge against downturns through options. Outlook for the Magnificent Seven in U.S. stocks? The performance of the Magnificent Seven in the U.S. is expected to continue to outperform other stocks in the index next year, albeit by only about 7 percentage points, the lowest level in seven years. The stellar earnings growth of the Magnificent Seven stocks compared to other components of the S&P 500 index has driven their collective performance. However, it is widely anticipated that the earnings growth gap between the Magnificent Seven and the S&P 493 index will shrink from an estimated 30 percentage points this year to 6 percentage points in 2025, and further to 4 percentage points by 2026. While earnings will continue to favor the Magnificent Seven, macro factors like trade policies may favor the S&P 493 index. Goldman Sachs Research Department economists expect stable U.S. economic growth above trend levels in 2025, which will benefit the S&P 493 index more sensitive to changes in the growth environment. The trade policy risks also lean more favorably towards the S&P 493 index compared to the Magnificent Seven, with a larger proportion of domestic earnings in the index. Trade frictions are identified as a significant risk in their base case scenario, especially stricter U.S. trade policies may have a more severe impact on economic growth outside the U.S. Nearly half of the Magnificent Seven's sales come from outside the U.S., compared to 26% for the S&P 493 index. Kostin suggests that mid-cap stocks may present opportunities for investors. The S&P 400 index has historically outperformed large-cap and small-cap stocks, with similar overall earnings growth to large-cap stocks and trading at a lower absolute P/E ratio of 16 times. Merger and acquisition outlook With the growth of the U.S. economy and corporate profits, and financial conditions becoming relatively more accommodative, Goldman Sachs analysts predict an increase in merger and acquisition activities in 2025. The incoming Republican government may relax regulations in certain industries, which could help facilitate more M&A activity. Goldman Sachs Research Department predicts that in 2025, there will be approximately 750 M&A deals exceeding $100 million completed in the U.S., a 25% increase compared to 2024. Corporate cash spending on M&A next year could increase by 20% to reach $325 billion. The total number of mergers should increase even more, as rising stock valuations make stocks a highly attractive cash alternative, according to Kostin. Future of AI investments There are still significant differences in investor views on the impact of artificial intelligence (AI), with some market participants believing in the transformative power of generative AI and others questioning whether companies can generate attractive returns through their high AI investments. By 2025, Goldman Sachs Research Department analysts expect investor interest in AI to shift from AI infrastructure to a broader "third stage" of AI - the launch of applications and monetization. This stage refers to companies that may benefit from the revenue that AI brings, rather than just companies building the underlying infrastructure for AI. These third-stage companies include software and service companies that provide investors with more durable growth and are less reliant on economic expansion or interest rate changes to drive stock prices.