Investing.com — Despite the favorable backdrop, stocks face a complex outlook in 2025 due to three key factors, according to a Goldman Sachs strategist.
First, the recent rapid rise in stock prices has already accounted for most of the expected positive news on economic growth. Second, high values are expected to limit future returns. Third, increased market concentration introduces additional portfolio risks.
Market concentration has increased in several dimensions – geographically, with the US becoming increasingly dominant; by sector, with technology bringing a significant share of capital return; and by individual shares.
“The top five U.S. stocks account for roughly a quarter of the index and nearly half of the returns over the past year,” Peter Oppenheimer, chief global equity strategist at Goldman Sachs, said in a report.
Oppenheimer notes that the strong rally in stocks in recent months has left markets “valued by perfection,” making them vulnerable to a correction. Goldman’s risk appetite index rose sharply, particularly in the US, where it rose 23% in 2024 after rising 24% in 2023.
Much of that return came later in the year as investors began to factor in potential interest rate cuts. The recent two-year rally in stock prices ranks in the 93rd percentile for similar periods in the last century.
While interest rates are expected to fall, expectations for a rate cut in the US have softened in recent months.
Fed funds rate futures now suggest less than a 40 basis point cut in 2025, down significantly from the 125 basis points forecast in September. Goldman Sachs economists, however, continue to forecast a rate cut of a total of 75 basis points.
This dynamic is caused by the increase in bond yields; US 10-year yields climbed back above 4.5%, up 100 basis points since September, with similar sharp increases seen in markets such as the UK.
Even with these developments, capital appreciation continued to rise.
“The valuation of the US stock market is at a previous high – in the last 20 years – and this remains true even if we exclude the largest technology companies,” the report said.
Outside the US, equity markets are relatively more affordable, but mostly trade near their long-term averages, with the exception of China.
