Investing.com– Goldman Sachs analysts said investors expect the S&P 500 to extend its current bull market into 2025 amid heightened optimism over the economy and expectations of looser regulations under President Donald Trump.
The investment bank said equity investors were expressing increased optimism that “animal spirits,” ie, psychological factors, will drive Wall Street higher in the coming year. The bank noted that a recent positive reading on small business sentiment furthered this notion.
Goldman Sachs expects the S&P 500 to rise 7% to 6,500 points by end-2025.
The investment bank said investor optimism had sparked a sharp increase in positioning in U.S. equities, with investors moving further into cyclical stocks while ditching defensives. This was apparent over the past month, with technology and consumer discretionary stocks being the biggest drivers of gains.
“The relative performance of cyclical stocks vs. defensive stocks suggests the equity market is already pricing real GDP growth well above 3%,” Goldman Sachs analysts said.
Low equity option implied volatility also meant that the cost of buying high upside exposure and downside protection remained cheap, allowing heightened positioning in futures and options.
But Goldman Sachs noted that stretched valuations presented a risk, with the disparity in stock valuations reaching its highest levels since 2021 and the late-1990’s tech bubble. The bank also noted that while investor spirits were high, it remained to be seen whether this would suffice in spurring further market gains.
The investment bank said dealmaking activity is expected to increase 25% in the coming year amid looser financial conditions, fewer regulations under Trump and increased CEO confidence.
Trump recently named Andrew Ferguson to Chair the Federal Trade Commission. Investors believe Ferguson will be friendlier to M&A activity than the current head, while still maintaining antitrust pressure against major technology firms.
Trump is expected to dole out a slew of expansionary policies, while also lowering regulatory scrutiny of sectors such as artificial intelligence and cryptocurrencies.
But a potential risk from a Trump presidency is heightened inflation, due to a protectionist stance towards trade and immigration. The President-elect has pledged to impose steep import tariffs on China, potentially sparking a renewed trade war with Beijing.