Goldman Sachs: Big questions for 2025
1. What is the situation of the American consumer?
I would argue that the most important story within the US economy, both in 2023 and 2024, was the durability of the American consumer. The basic sequence: labor market strength = accelerating real disposable income = robust household spending. Add to that the huge gains in net worth over the past five years (over $50 trillion), and the American consumer had to do what he does best. Enter David Mericle to weigh in:
We see the same simple story for solid (+2.3%) consumer spending growth in 2025 as in 2023 and 2024. A healthy labor market should keep real income growing at a 2.5% pace across the income distribution this year, and this should be the main driver of spending growth. Wealth effects should provide a modest additional boost because household finances are in good shape and have been further strengthened by steady increases in stock prices, which tend to support consumer spending gradually over a few quarters.
2. What is the character and sequence of Trump's policy 2.0?
It seems reasonable to assume that the first 100 days will be eventful. On any given day, Mr. Market may not like the direction of a particular policy idea (particularly regarding tariffs and immigration). That said, I still think the overall bias will be in favor of growth, businesses, and markets. My point here is that it will be noisy and at times uneven, but the overall policy momentum will be a net positive for US stocks (particularly regarding deregulation). David Mericle gives us his take:
We expect tariffs on imports from China and on cars, but not a universal tariff. We expect a tighter policy to slow net immigration to about 750,000 per year, moderately below the pre-pandemic trend of 1 million per year. And we expect a full extension of the 2017 tax cuts and some additional personal tax cuts, but we are skeptical that proposals for huge spending cuts will be enough to significantly reduce the deficit. Tariffs can be implemented by the White House quickly on its own, and the White House can partially implement a tighter immigration policy, but tax cuts require legislation and will take longer. This means that policies that are GDP-negative will likely come before those that are GDP-positive, although we think the net impact on GDP growth this year is a modest -0.2 pp.
3. Will US fiscal concerns be felt in 2025?
In my view, one of the surprises of the past year was the absence of market stress around US debt and deficits. Put another way: while bond vigilantes showed their teeth in late 2023, there was no serious reckoning in 2024. While this theme tends to come in and out of the market spotlight with a random cadence, one can reasonably wonder whether it will appear at some point in 2025 (the past month has contained some elements). David Mericle gives us an opinion:
Again, we expect a full extension of the 2017 tax cuts; additional personal tax cuts worth about 0.2% of GDP to accommodate some of President-elect Trump’s campaign proposals; a recovery in federal spending growth, particularly on defense; and a modest offsetting gain in tariff revenues. This would leave the primary deficit as a share of GDP roughly stable. We are concerned about fiscal sustainability – the primary deficit is 5% of GDP wider than it has historically been when the economy was at full employment, the debt-to-GDP ratio is near a new all-time high, and real interest rates along the Treasury curve are much higher than last cycle – but we do not expect Congress to undertake major deficit reduction, and it is very difficult to know when markets might become more concerned.
4. Should the equity investor market be concerned about the recent tightening of financial conditions in the United States?
Since the December FOMC meeting, the broad set of market moves would constitute a headwind to growth (stronger dollar, lower stocks and wider credit spreads… and most notably higher US rates). The main driver has been the Fed’s tone, some renewed concerns about the path of US inflation (can be seen in the breakevens) and capital flows. Ryan Hammond gives us his take:
US stocks are generally able to digest gradual increases in bond yields. However, when bond yields rise sharply, say by more than two standard deviations in a month, stocks typically sell off (about 60 basis points on 10-year US bonds today). US stocks also typically continue to rise if market pricing of economic growth is improving alongside higher bond yields. However, if other factors, such as high inflation or aggressive Federal Reserve policy, drive yields higher, stocks typically fall. Over the past month, bond yields have risen sharply, while market pricing of economic growth has remained virtually unchanged.
5. US equities: How serious is the risk of perfect pricing?
Throughout my time in the markets, I think that over-obsession with valuation has probably hurt more investors than it has helped. I also think there is a distinction between a “fully valued” market and an “overvalued” market (our model would argue that the current PE multiple qualifies as the former, not the latter). That said, the fact remains: no matter what measure you choose – applied to any US index you prefer – current valuation is high relative to history. This makes me think that short-term investors should give it little thought, while long-term investors should generally know what ballpark they are playing in. Ryan Hammond gives us his take:
Both absolute and relative valuations of US stocks are stretched relative to history. The forward P/E of 21x currently sits in the 90th percentile relative to history. However, based on the current macro environment and company fundamentals, our model suggests that the S&P 500 is trading roughly in line with its fair value (TP: I think this is an important point, as argued above). Nonetheless, our prior research shows that high absolute equity valuations are associated with higher downside risk. Looking ahead, we forecast limited expansion in valuations and instead expect earnings to drive stock prices higher.
6. US equities: To what extent is the market dependent on the AI issue?
You know how this goes: The Magnificent Seven added $6 trillion in market cap by 2024, and the AI story was as powerful as any other in that mix. Last year, at times, it seemed like the entire world revolved around the topic, or even a single stock. So what happens if one of the bigwigs pulls a hamstring this year? Enter Ryan Hammond for an opinion, where he would emphasize what the history book says about the consequences of high concentration:
NVDA and the “hyperscalers” (MSFT, GOOGL, META, AMZN) accounted for 41% of the S&P 500’s 25% total return in 2024. However, the median stock in the index still returned 12%, and the leadership of the leading companies changed hands many times during the year. As we have shown above, the S&P 500 rose more often than it fell during the 12 months following past episodes of peak concentration. A “recovery” of the rest of the market would be more benign than a “recovery” of the market leaders. While we expect that stocks associated with AI infrastructure (“Phase 2”) may continue to rise in 2025, we believe that investor attention will increasingly focus on companies with AI-enabled revenues (“Phase 3”), as the magnitude of infrastructure surprises continues to diminish.
7. Where are we in the AI build/experiment/deploy/harvest continuum?
When we spoke in March, my colleague George Lee said that 2023 would be the year of “building”… 2024 would be the year of “experimentation”… and 2025 would be the year of “implementation” (actually, deployment and scaling). Along with this, the question of when investors will realize the return on investment from AI arose. Here’s a market value analysis from George:
The year 2024 in AI ended in a way that could easily confuse financial market observers. On the one hand, there was much talk about “the end of scaling laws,” which marked a slowdown in the previously relentless advance of these models. On the other hand, a flurry of product announcements as well as the emergence of AI agents and “reasoning models” suggested that we might see an acceleration in the march of generative AI progress.
These themes promote the potential of 2025 as an era of “deployment and scale,” when companies begin to operationalize AI tools in earnest, expand into areas beyond the bastions of software development and customer service, and realize tangible value, while reminding us that this novel technology continues to develop and evolve very rapidly and profoundly. This continued pace of progress is inspiring (and sometimes surprising), but it makes the task of implementing this technology in enterprise environments inherently difficult.
In short: there is expected to be continued and pronounced progress in technology (perhaps more than most expect), increasing evidence of business value realization, and a certain level of impatience in senior management as we reconcile the potential of technology with the complexity of implementing a significant change in ways of working. One way to look at that situation is that there is an opportunity for certain forward-thinking companies to leverage technology to achieve real “operational alpha” by 2025.
8. US equities: What is the positioning/fund flow setup?
In my view, the market absorbed a lot of supply in late December (from pension funds and the leveraged community). As we move into January, local technical indicators should improve: not only are hedge funds less at risk, but this tends to be the best month of the year for retail inflows. Scott Rubner offers a tactical view:
The technicals of the stock market will improve in January as investors return to their trading desks in 2025. January is the most important month of the year for asset allocation flows into equities and this may have been delayed by a week due to market holidays. Maximum book liquidity was at $3.5 million, a two-year low, which exacerbated market moves and masked the overall effect of January. In addition, hedge funds typically increase their gross exposure in January. Systematic and volatility control supply will be reduced given a potential reset of implied volatility. I am also following the retail cohort, which after record trading volume in 2024, has the potential to increase its trading presence via short-dated options at any time. The market has absorbed a lot of supply and this may start to subside.
9. Will 2025 be a year of blockbuster M&A?
From my position in sales and trading, it looks like everything is set for a good run of deals: above-trend growth + easy financial conditions + regulatory change + deal pipeline. Enter Stephan Feldgoise for a balanced view:
A measured and balanced enthusiasm is appropriate. Headwinds remain impacted by geopolitical risk, inflationary risk and sovereign national interests. Regulatory risk appears to be normalizing, but transactions will continue to be subject to scrutiny consistent with historical periods. Overall, there are reasons for optimism, but balanced expectations are appropriate.
10. Japanese stocks: Trump 2.0’s backdoor winner?
I have had this view for the past few months, based on the logic that Japan’s positioning as the key US defense partner in the region will only intensify going forward. In more market-focused terms, if the incoming US administration is successful in its implementation of pro-cyclical policies (which is a bet I am willing to make), no market favors a reflationary impulse more than Japan. Bruce Kirk gives his take:
The firm’s base case scenario for 2025 (i.e., a year characterized by low U.S. recession risk, robust global economic growth, and a strong U.S. dollar) is inherently bullish for Japanese stocks. Domestically, we focus on areas where there is relatively clear policy visibility, making us particularly bullish on stocks exposed to higher defense spending or continued monetary policy normalization. Japan already has a clear path to increasing defense spending to 2.0% of GDP by fiscal 2028, and the new U.S. administration could facilitate an acceleration or deepening of that trajectory.
11. Is there a risk that the US dollar will become a wrecking ball?
As I mentioned before, I think the main trend for the dollar is up. The framework is simple: the US offers superior nominal GDP growth, superior carry, superior assets, and superior capital flow. With that comes the question of when excessive dollar strength is no longer a good thing, i.e. when the dollar affects global liquidity in a way that we experienced at times in 2016 and 2018. Karen Fishman gives us her take:
Our base case is that the dollar should broadly continue to strengthen in 2025, but a higher or sharper spike could put pressure on emerging market economies, assets, and central banks through tighter credit conditions and higher inflation. Emerging markets in Asia have fairly strong reserves and a likely willingness to slow the pace of domestic currency depreciation, but places with fewer resources would be of greater concern. We would likely start to worry if EUR/USD drops 10%, which is also in line with our estimate of how the dollar might respond to a broader trade conflict. However, that brings us to an important point: the source of strength matters. Dollar strength due to US growth and asset outperformance should pose less of a global liquidity risk than dollar strength due to a broader trade conflict or a hawkish Fed, where the dollar would be more the symptom than the cause.
12. The final question… with a resounding answer: what is the geopolitical configuration?
I'm a liberal arts graduate who spends his days staring at screens and talking on the phone, so I'll start by saying that I have no credentials in this department. However, as a student of markets, I would say this from years of pattern recognition around the geopolitical variable: (1) I know nothing; (2) very few people know anything; (3) the market has no moral conscience; (4) in the long run, economics supersedes everything. Enter Jared Cohen to weigh in:
If economics trumps all, then the global economic landscape Donald Trump is inheriting now is very different than it was when he first took office eight years ago. The United States is moving ahead, as our colleagues have noted, but for the first time in more than four decades, China’s share of global GDP is shrinking. If Beijing is in a stronger military position today, but in a much weaker relative economic position, how does that change competition? President Trump can make good on his promise of tariffs—and more tariffs—so expect an economically troubled Beijing to respond with asymmetric moves, especially around supply chains: targeted export controls on specific companies or components, new regulatory measures and investigations, tighter political control over industry, and so on.
We talk so much about geopolitics because this is the most dangerous period in global affairs since at least the Cold War, and China – a peer or near-peer competitor – has a role in every foreign policy challenge the new administration will face. It is Russia’s top export destination and will play a role in negotiations in Ukraine; it is Iran’s top oil importer; and it is the top trading partner of nearly every country in Latin America, where the State Department under Secretary Rubio will be heavily focused. Any solution to any of the global conflicts or risks facing the United States will need to have a Chinese component, not to mention Indo-Pacific problems like Taiwan and South China.
When we talk about geopolitics, we usually talk about risks, and rightly so, but geopolitics is not always a zero-sum game. We are witnessing a once-in-a-generation reorientation of trade and investment flows toward new and attractive destinations: Japan, Vietnam, India, Australia, and Mexico, for example, are benefiting from “nearshoring” and “friendshoring.” The energy- and capital-rich Gulf Arab states are setting the pace, investing in their own economic transformations, often navigating between Beijing and Washington as they do so. Countries that can lead their own global agendas in this way I call geopolitical swing states.
The post-October 7 war in the Middle East is not going to be a forever war, but when it is over, the region will look very different. There are two broad possibilities: 1) some version of the status quo ante, leaving two kinds of countries: an economically driven and transforming Arab Gulf on its own, and other countries like Iraq and Lebanon competing with Iranian proxies, while Israel charts its own course; or 2) a new regional arrangement.