Investing.com– Goldman Sachs analysts say investors expect the S&P 500 to extend its current bull run through 2025, amid greater optimism about the economy and expectations of looser regulations under President Donald Trump.
The investment bank said stock investors were expressing greater optimism that “animal spirits,” meaning psychological factors, will drive Wall Street higher over the next year. The bank noted that a recent positive reading on small business sentiment encouraged this idea.
Goldman Sachs expects it to rise 7% to 6,500 points by the end of 2025.
The investment bank said investor optimism had led to a sharp increase in positioning in US stocks, with investors moving more into cyclical stocks while abandoning defensive ones. This was evident over the past month, with technology and consumer discretionary stocks being the biggest drivers of gains.
“The relative performance of cyclical stocks versus defensive stocks suggests that the stock market is already pricing in real GDP growth well above 3%,” Goldman Sachs analysts said.
The low implied volatility in stock options also meant that the cost of purchasing high upside exposure and downside protection remained cheap, allowing for greater positioning in futures and options.
But Goldman Sachs noted that overblown valuations presented a risk, as the disparity in stock valuations reached its highest levels since 2021 and the tech bubble of the late 1990s. The bank also noted that while investor sentiment was high, it remained to be seen whether this would be enough to spur further gains in the market.
The investment bank said trading activity is expected to rise 25% next year amid looser financial conditions, fewer regulations under Trump and greater CEO confidence.
Trump recently appointed Andrew Ferguson to chair the Federal Trade Commission. Investors believe Ferguson will be friendlier to M&A activity than the current boss, while maintaining antitrust pressure against major technology companies.
Trump is expected to pursue a series of expansionary policies while reducing regulatory scrutiny of sectors such as artificial intelligence and cryptocurrencies.
But a potential risk of a Trump presidency is higher inflation, due to a protectionist stance toward trade and immigration. The president-elect has pledged to impose high import tariffs on China, which could spark a new trade war with Beijing.