Investing.com – Despite the supportive backdrop, stocks face a complicated outlook in 2025 due to three key factors, according to a Goldman Sachs strategist.
First, the recent rapid increase in stock prices has already factored in much of the expected positive news about economic growth. Second, high valuations are expected to limit future returns. Third, high market concentration creates additional portfolio risk.
Market concentrations have grown along several dimensions – geographically, with the United States increasingly dominant; By sector, technology drives a significant share of stock returns; And through individual stocks.
“The five largest U.S. stocks account for nearly 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 seen in stocks in recent months has left markets “perfectly priced,” making them vulnerable to a correction. Goldman Sachs' risk appetite index rose sharply, particularly in the US, where it rose 23% in 2024 after a 24% increase in 2023.
Much of these returns came later in the year as investors began to take into account potential interest rate cuts. The recent rise in stock prices over the past two years ranks at 93 percent for similar periods over the past century.
While interest rates are expected to fall, expectations of interest rate cuts in the United States have declined in recent months.
Futures linked to the federal funds rate now point to cuts of less than 40 basis points for 2025, a significant decline from the 125 basis points expected in September. However, Goldman Sachs economists continue to expect interest rate cuts totaling 75 basis points.
This dynamic is further exacerbated by the increase in bond yields; US 10-year bond yields rose again above 4.5%, up 100 basis points since September, with similar sharp increases observed in markets such as the UK.
Even with these developments, stock valuations continued to rise.
“The US stock market has a valuation at its previous peak – in the past 20 years – and this remains true even if we exclude the largest technology companies,” the report states.
Outside the United States, stock markets are relatively affordable but trade largely near their long-term averages, with the exception of China.
