Investing.com — Investors expect the S&P 500 to extend its current bull market into 2025 amid growing optimism about the economy and expectations of looser regulations under President Donald Trump, Goldman Sachs analysts said.
The investment bank said stock investors are expressing increasing optimism that “animal instincts,” meaning psychological factors, will push Wall Street higher next year. The bank noted that the recent positive reading of small business sentiment reinforced this idea.
Goldman Sachs expects the index to rise 7% to 6,500 points by the end of 2025.
Investor optimism has led to a sharp increase in US stock positions, with investors shifting more into cyclical stocks as defenses are shed, the investment bank said. This was evident over the past month, as technology stocks and consumer discretionary stocks were the biggest drivers of gains.
“The relative performance of cyclical stocks versus defensive stocks suggests that the stock market is already pricing in real GDP growth in excess of 3%,” Goldman Sachs analysts said.
Lower stock option implied volatility also meant that the cost of purchasing high upside exposure and downside protection remained cheap, allowing for increased positions in futures and options.
But Goldman Sachs noted that extended valuations pose a risk, with the disparity in stock valuations reaching its highest levels since 2021 and the technology bubble of the late 1990s. The bank also noted that although investor sentiment is high, it is not yet clear whether this will be enough to spur further gains in the market.
The investment bank said dealmaking activity is expected to rise by 25% next year amid looser financial conditions, less regulation under Trump and increased CEO confidence.
Trump recently appointed Andrew Ferguson to head the Federal Trade Commission. Investors believe Ferguson will be more friendly toward M&A activity than the current president, while maintaining antitrust pressure against Big Tech.
Trump is expected to issue a series of expansionary policies, while reducing regulatory scrutiny of sectors such as artificial intelligence and cryptocurrencies.
But the potential risk from a Trump presidency is higher inflation, due to his protectionist stance on trade and immigration. The president-elect has pledged to impose heavy tariffs on imports from China, which could lead to a renewed trade war with Beijing.
