Investing.com - Global stock markets have a favorable backdrop heading into 2025, but they now appear to be “priced for perfection”, according to Goldman Sachs (NYSE:GS), leaving increasing scope for a correction.
Rising inflation and interest rates that led to fears of a hard landing through much of 2022 and 2023 have long dissipated, analysts at Goldman Sachs said, in a note dated Jan. 9.
The bank continues to expect positive global growth through 2025 and beyond with lower interest rates, and this combination has, at least in the past, been associated with strong equity returns.
However, despite the favorable backdrop, the set-up for equities entering 2025 is complicated by three main factors, the influential investment bank said.
“First, the speed of the recent rises in stock prices has reflected much of the good news that we are expecting on growth. Second, high valuations are likely to limit forward returns. Third, unusually high market concentration increases portfolio risks: concentration has increased by geography (the US has been increasingly dominant), by sector (technology has generated the bulk of equity returns), and by stock (the five biggest stocks in the US account for roughly a quarter of the index),” Goldman said.
This leaves equities “priced for perfection”, the bank added, most obviously in the US where the S&P 500 rose 23% in 2024 following a 24% return in 2023.
“While we expect equity markets to make further progress over the year as a whole – largely driven by earnings – they are increasingly vulnerable to a correction driven either by further rises in bond yields and/or disappointments on growth in economic data or earnings,” Goldman added.