Why Goldman Sachs Thinks U.S. Stocks Will Keep Rising in 2025?

Welcome back to our latest edition of Market Insights with Sanjeev Kaushik.

In this edition, we cover the pivotal forces shaping the U.S. stock market as we head into 2025.

From the Federal Reserve’s latest rate decisions to the evolving economic dynamics, we dive deep into the trends and strategies that could define the year ahead.

Will US stocks maintain their bullish momentum, or are we on the cusp of a market shift? Join us as we explore expert predictions, key catalysts, and actionable insights to navigate the opportunities and risks of the coming year.

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1. Goldman Sachs Predicts More US Stock Gains

The financial markets are abuzz with anticipation for 2025, fueled by a blend of optimism and cautious recalibration.

Following the Federal Reserve’s latest rate decisions and the evolving economic landscape, key insights suggest that US stocks are poised for continued growth.

Here's an in-depth exploration of why Goldman Sachs believes this bullish momentum could persist in the coming year.

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1.1 The Federal Reserve’s Impact

The Federal Reserve has been methodically recalibrating interest rates, with cuts totaling 100 basis points in 2024. This has brought the federal funds rate down to 4 3/8 percent. While this level remains restrictive relative to underlying inflation and neutral rate estimates, it’s far less stringent than before.

This slower pace of rate cuts signals a cautious but optimistic approach to monetary policy. The decision to move gradually reflects the resilience of economic growth, which exceeded 2.5% in 2024—a figure that outpaces most measures of trend growth.

This deliberate strategy, paired with progress in reducing inflation, positions the Fed to maintain a balanced stance. With inflation still above the 2% target, the bar for additional cuts is higher.

However, the steady normalization of rates creates a supportive environment for equities by mitigating borrowing costs and encouraging investment without overheating the economy.

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1.2 Market Valuations: Room for Growth

Equities are currently trading at price-to-earnings (P/E) ratios of around 22 times earnings. While some view these valuations as elevated, they’re underpinned by the exceptional performance of market-leading companies. These firms have demonstrated extraordinary earnings growth, strong cash flows, and the capacity to repurchase shares, which helps sustain investor confidence.

Moreover, the argument for US stocks goes beyond current valuations. The equity risk premium for high-performing companies has been gradually declining, reflecting their ability to grow into their valuations.

This trend underscores the broader narrative of US exceptionalism, which has consistently driven outperformance in global stock markets. Robust corporate fundamentals, coupled with pro-growth fiscal policies, further strengthen the case for continued bullish momentum.

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1.3 US Exceptionalism: A Key Driver

The US remains a beacon of economic dynamism and innovation, bolstered by policies that prioritize domestic industries. This America-first approach aligns with an administration intent on fostering favorable conditions for American businesses.

From fiscal support to normalized interest rates, the US economy is well-positioned to sustain healthy levels of growth and near-full employment. This exceptionalism has been a cornerstone of the US market’s dominance and is unlikely to wane anytime soon.

In fact, this trajectory appears set to accelerate, with capital markets activity expected to pick up.

Equity and debt markets are already showing signs of resurgence, supported by lower rates and pro-cyclical policies.

This environment creates fertile ground for increased mergers and acquisitions (M&A) activity and enhanced liquidity across financial channels.

Goldman Sachs' take on US exceptionalism [Podcast]: Click Here to Listen

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1.4 Tailwinds for Capital Markets

The gradual normalization of interest rates, combined with easier financial conditions, is expected to fuel higher levels of capital markets activity.

Debt issuance has already gained momentum, and equity markets are following suit. The backdrop of pro-cyclical policies further amplifies this trend, creating opportunities for businesses to raise capital and expand.

Private markets have also played a significant role in shaping this landscape. While private equity has captured a growing share of capital formation, public markets are regaining traction as conditions stabilize.

The interplay between these two spheres is likely to drive innovation and investment, ensuring a robust pipeline of opportunities for investors.

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1.5 A Balanced Approach

Valuation concerns are a perennial theme in investing. While high valuations warrant caution, they’re not necessarily a deterrent. Instead, they invite a nuanced approach to risk management.

Investors are advised to focus on their risk tolerance and adopt strategies that balance potential rewards with acceptable levels of exposure.

The current environment suggests that a hedged approach may not be necessary. Instead, embracing calculated risks within the context of a diversified portfolio could yield favorable outcomes.

With fiscal and monetary policies aligning to support economic stability, the outlook for equities remains positive.