Goldman Sachs is out with its much anticipated 2025 equity outlook to clients and it calls for stocks to gain 11% from here (12% total return with dividends) as a growing economy and improving profit margins fuel sizable earnings growth. “Our view is predicated on continued US economic expansion, earnings growth of 11% in 2025 and 7% in 2026, and a forward P/E multiple of 21.5x at the end of next year, a 1% compression from the current P/E of 21.7x,” wrote the firm’s equity strategy team led by David Kostin, in a note late Thursday. “We estimate net margins will expand by 78 bp to 12.3% in 2025 followed by a further 35 bp increase to 12.6% in 2026.” (1 basis point equals 0.01%.) Goldman sets its new S & P 500 target at 6,500. The benchmark closed at 5,893.62 on Monday, amid a booming 2024 where the index has jumped 24% on cooling inflation and growing enthusiasm about artificial intelligence. Heading into this year the Goldman team was too bearish. When it originally set its 2024 forecast last November it called for the index to climb just 5% to 4,700. Then stocks rallied into year-end, exceeding that index level in December of 2023 and causing Goldman to raise its 2024 forecast before the year even began to 5,100 . .SPX YTD mountain S & P 500, YTD That too proved to be too to pessimistic amid the booming market this year, forcing Goldman to raise its forecast with its latest 2024 year-end prediction at 6,000, according to the CNBC Pro strategist survey . In terms of the impact of policies from President elect Donald Trump, Goldman sees a lower tax rate canceling out the negative drag from potential tariffs. States the report: “Our economists assume the Trump 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.” What to buy The Goldman team named five strategies for clients to follow for the new year: The ‘Magnificent 7’ stocks of Amazon, Apple, Alphabet, Meta, Microsoft and Tesla will continue to outperform, the firm said, although by a narrower margin than past years. Merger activity to jump by 25% next year, the firm forecasts. Some of Goldman’s takeover candidates include Zoom Video and Electronic Arts. Some more are detailed here . Buy stocks that cater to small businesses such as Martin Marietta Materials, Waste Management and Fiverr International, the firm said. Stocks leveraged to the monetization phase of AI like Apple, Adobe, Mastercard and Uber will outperform, the report said. Goldman tells clients to favor materials, software and utilities among sectors. “The economic backdrop favors cyclically exposed sectors and industry groups, but the equity market has already moved sharply to price that view,” states the report. Goldman does caution the coming year could be a bumpy one, especially with the market’s gain this year leaving the benchmark with such a high valuation. “High multiples are weak signals for near-term returns, but typically increase the magnitude of market drawdown during a negative shock,” states the report. “But event risk remains high heading into 2025, including from the potential threat of an across-the-board tariff and the potential risk from even higher bond yields.”
Goldman’s 2025 equity forecast is out and calls for the S&P 500 to gain 11% from here
Nov 19, 2024
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