The latest research report from Goldman Sachs' research division reveals a cautiously optimistic outlook for the global stock market heading into 2025. With expectations of robust economic expansion and steady growth in corporate earnings, the S&P 500 Index is projected to rise for the third consecutive year. David Kostin, the chief U.S. equity strategist at Goldman Sachs, anticipates that by the end of 2025, the S&P 500 will hit 6,500 points. This forecast implies a total return rate of about 10% when factoring in dividends, with expected earnings growth of 11% in 2025, followed by a further 7% in 2026.

Goldman Sachs suggests that corporate revenue growth at the index level typically aligns with nominal GDP growth. Their prediction of a 5% sales growth for the S&P 500 resonates with economists' forecast of a 2.5% growth in real GDP, alongside an anticipated inflation rate decrease to 2.4% by the end of next year. This synchronization indicates a positive backdrop for the investment landscape.

The government’s anticipated trade policies, including tariffs on imported vehicles and corporate tax cuts, are also highlighted in the report. Kostin noted, “The impact of these policy changes on our earnings per share forecast approximately offsets each other.” Goldman Sachs’ earnings per share projections for the S&P 500 are set at $268 for 2025 and $288 for 2026, aligning with the consensus median forecast while falling short of the bottom-up consensus based on analysts’ predictions for individual company earnings, which are $274 and $308, respectively.

Historically, elevated stock valuations pose risks for investors. Over the past two years, the price-to-earnings (P/E) ratio of the S&P 500 has surged by 25%. Currently resting at 21.7 times earnings, this figure is situated at the 93rd percentile of historical valuations, starkly higher compared to the 17 times P/E ratio recorded at the end of 2022. Such elevated valuations could indicate potential volatility ahead, as evidenced by the performance dynamics when initial valuations are high amidst adverse economic shocks.

As for the outlook for U.S. equities in the coming year, several risks loom large. Kostin notes that the market has priced in an optimistic macroeconomic backdrop, which introduces potential dangers in 2025. High P/E ratios may not signal outcomes for short-term returns, yet during negative shocks, elevated initial valuations often exacerbate market downturns. Despite these warnings, Goldman’s macroeconomic assumptions point towards continued economic and earnings growth over the next few years, with bond yields likely remaining near current levels. Nevertheless, 2025 presents its own set of uncertainties, such as the implications of potential comprehensive taxation and the risk of rising bond yields.

Conversely, if the U.S. financial policy becomes more favorable or if the Federal Reserve opts for a softer monetary stance, investors may encounter heightened returns. Kostin encourages investors to seize opportunities during periods of low volatility to capitalize on stock market rallies or utilize options for downside protection.

Shifting the focus to the so-called "Magnificent Seven" stocks, which have dominated the market, their performance is expected to continue outpacing that of other stocks within the S&P 500, albeit by a margin that is its lowest in seven years—approximately 7 percentage points. The impressive earnings growth of these tech giants has primarily fueled their collective performance, leading to predictions that the earnings growth gap between these stocks and the remaining 493 companies in the S&P 500 will narrow from an estimated 30 percentage points this year to just 6 points by 2025, and further down to 4 points by 2026.

While earnings remain favorable for the Magnificent Seven, broader macroeconomic factors, including growth and trade policies, may favor the 493-member cohort of the S&P 500. Goldman Sachs’ economists project a stable U.S. economy, which is expected to grow above trend levels, positively impacting the more growth-sensitive S&P 493 stocks. Additionally, the inherent trade policy risks are more pronounced for the Magnificent Seven, as these companies derive nearly half of their sales from international markets, compared to just 26% for the S&P 493.

Kostin also points out that mid-cap stocks might present attractive opportunities for investors. The S&P 400 Index has consistently outperformed both large-cap and small-cap stocks due to comparable earnings growth trends, combined with more appealing fundamental ratios at a relatively lower absolute P/E of 16 times earnings.

Looking ahead, as the U.S. economy progresses and corporate profits continue to rise, Goldman’s analysts are anticipating an uptick in merger and acquisition (M&A) activity come 2025. The incoming Republican administration may further relax regulations across certain industries, potentially rekindling M&A enthusiasm within the market.

Goldman Sachs estimates that around 750 M&A deals worth over $100 million will close in the U.S. by 2025—marking a 25% increase from the previous year. It is projected that cash expenditures on M&A will grow by 20% next year, reaching approximately $325 billion. Furthermore, the total merger volume may further amplify as rising stock valuations render equities an attractive replacement for cash, highlighting how the financial landscape continues to evolve.

Regarding the influence of artificial intelligence (AI) on investment strategies, market participants remain divided in their perceptions. Some recognize the transformative potential of generative AI, while others express skepticism concerning the ability of firms to generate compelling returns from extensive investments in AI technologies.

Goldman Sachs analysts predict that by 2025, investors' interest in AI will pivot from foundational AI infrastructure to a broader “third phase” of AI deployment focused on applications and monetization. This stage pertains to companies that stand to gain revenue from AI advancements rather than those merely constructing the underlying infrastructure. Examples of such companies include software and service providers that offer sustained growth opportunities with relative insulation from economic fluctuations and interest rate changes, allowing them to thrive amidst evolving market conditions.