Investing.com -- Goldman Sachs (NYSE:GS) projects the S&P 500 index will rise to 6,500 by the end of 2025, a target that implies an 11% upside from current levels. If materialized, this would place the gain in the 46th percentile of historical 12-month returns for the index since 1980.
The forecast aligns with the one from its peer Morgan Stanley (NYSE:MS), which also set its base case S&P 500 12-month price target at 6,500. The bank said it expects the recent earnings growth broadening to continue next year “as the Fed cuts rates into next year and business cycle indicators continue to improve.”
Goldman Sachs’s target is based on assumptions of continued US economic expansion, 11% earnings growth in 2025, and a slight compression in the forward price-to-earnings (P/E) multiple.
The investment bank's outlook for the S&P 500 includes expectations for revenue growth to align with nominal GDP growth. More concretely, it anticipates a 5% sales growth for the index, consistent with their forecast of 2.5% real GDP growth and a deceleration of inflation to 2.4% by the end of the next year.
Furthermore, Goldman estimates net margins will expand to 12.3% in 2025 and then to 12.6% in 2026. The bank’s economics team believes the Trump administration will implement targeted tariffs on imported automobiles and certain imports from China, as well as a 15% corporate tax rate for domestic manufacturers.
“On net, the impact of these policy changes on our EPS forecasts roughly offset one another,” Goldman said in a note.
On valuation, the report notes that the S&P 500 index's P/E multiple has expanded from 17x at the end of 2022 to 21.7x today, placing it in the 93rd percentile historically.
Looking ahead, Goldman Sachs' fair value model suggests a modest compression of the P/E multiple to 21.5x by the end of 2025. In addition, the yield gap between the earnings yield of the S&P 500 and the real 10-year Treasury yield is projected to be approximately 280 basis points.
The Wall Street firm cautions that the equity market, which is already pricing in an optimistic macroeconomic backdrop and high valuations, carries risks into 2025.
It points out that high multiples can signal weaker near-term returns and potentially amplify market downturns during negative shocks.
“In our baseline macro outlook, the economy and earnings continue to grow and bond yields remain around current levels,” the note says. “But event risk remains high heading into 2025, including from the potential threat of an across-the-board tariff and the potential risk from even higher bond yields.”
On the other hand, a more friendly mix of fiscal policy or a more dovish Federal Reserve presents upside risks.