Investing.com — Despite a supportive backdrop, equities face a complex outlook in 2025 due to three key factors, according to a Goldman Sachs strategist.
First, the recent rapid increase in stock prices has already priced in much of the anticipated positive news on economic growth. Second, high valuations are expected to limit future returns. Third, elevated market concentration introduces additional portfolio risks.
Market concentration has grown in several dimensions—geographically, with the US becoming increasingly dominant; by sector, with technology driving a significant share of equity returns; and by individual stocks.
“The five biggest stocks in the US account for roughly a quarter of the index and nearly half the returns over the past year,” Peter Oppenheimer, chief global equity strategist at Goldman Sachs, said in a report.
Oppenheimer notes that the strong equity rally in recent months has left markets “priced for perfection,” making them susceptible to a correction. Goldman’s risk appetite indicator has risen sharply, particularly in the US, where the climbed 23% in 2024 following a 24% gain in 2023.
Much of these returns came later in the year as investors began factoring in potential interest rate cuts. The recent two-year surge in stock prices ranks in the 93rd percentile for similar periods over the past century.
While interest rates are expected to decline, expectations for rate cuts in the US have been tempered in recent months.
Futures tied to the federal funds rate now suggest less than 40 basis points of cuts for 2025, a significant reduction from the 125 basis points anticipated in September. Goldman Sachs economists, however, continue to project rate reductions totaling 75 basis points.
Compounding this dynamic is the increase in bond yields; US have climbed back above 4.5%, up 100 basis points since September, with similar sharp increases observed in markets like the UK.
Even with these developments, equity valuations have continued to rise.
“The US equity market has a valuation at its previous peak – in the last 20-years – and this remains true even if we exclude the largest technology companies,” the report writes.
Outside the US, equity markets are relatively more affordable but are largely trading near their long-term averages, with the exception of China.
