- Goldman Sachs predicts the S&P 500 will reach 6,500 in 2025.
- The bank cited Donald Trump's "The Art of the Deal" as a roadmap for investing tips.
- Investors should broaden out and focus on opportunities in mid-caps, mergers, and AI, Goldman said.
Goldman Sachs projects the S&P 500 will reach 6,500 next year, representing an over 10% appreciation from current levels.
For investors curious on how to prepare for a longer-lasting bull run, analysts took a page from president-elect's 1987 investing guide.
"'The Art of the Deal' offered readers advice on how to conduct a business negotiation and achieve success as an investor," a team of analysts led by chief US equity strategist David Kostin wrote on Monday.
"The author — who has just been re-hired by the American electorate to be the 47th President of the United States — also provides a roadmap for our 2025 US equity strategy recommendations."
Here are five principal takeaways that investors should adopt in the coming year:
- "Think Big:" Broaden out.
"I like thinking big. I always have," the president-elect wrote in his memoir. "To me it's very simple: if you are going to be thinking anyway, you might as well think big."
It's a mantra stock investors have embraced in 2024, and shouldn't lose sight of now, Goldman said. Traders that adhered to it by investing in the S&P's biggest stocks have outperformed their competition, as top seven equity leaders have returned 148% in aggregate since the end of 2022.
However, Goldman expects the outperformance gap between the Magnificent 7 stocks and the rest of the S&P 500 to shrink to its smallest margin in seven years.
To account for improving earnings growth across the index, big-thinking investors should benchmark Magnificent 7 exposure and look for opportunities among the S&P's mid-cap stocks in 2025, Goldman said, citing benefits from trade policy and economic growth.
Investors should also seek out stocks with revenue exposure to small- and medium-sized businesses, Goldman said. This part of the market skyrocketed during Trump's first presidential term, and improving sentiment could trigger another rebound this time around.
- "Maximize your options:" M&A exposure
Goldman recommended that investors hold a basket of possible M&A candidates, as merger activity will likely improve in 2025.
The bank predicts earnings growth, strong business sentiment, and easing fiscal conditions will drive M&A cash spending up by 20% next year. An estimated 750 US M&A deals over $100 million will be completed.
Owning companies that could be acquired reduces investment risk and has a history of beating the market. For instance, stocks in a Goldman-tracked basket of M&A candidates outperformed the equal-weight S&P 1500 by 300 basis points during Trump's first term.
"Maximize Your Options: I never get too attached to one deal or one approach. I keep a lot of balls in the air, because most deals fall out, no matter how promising they seem at first," Trump wrote in his book.
- "Deliver the goods:" Artificial intelligence
In 2025, Goldman expects the AI investing trend to move beyond chipmakers building hardware, as well as firms involved with the infrastructure that powers the new technology.
The market could instead begin to uplift companies that monetize AI, a number of which reside in the software and services sector, and include names such as Q2 Holdings, Fortinet, and Meta.
"You can't con people, at least not for long. You can create excitement, you can do wonderful promotion and get all kinds of press, and you can throw in a little hyperbole. But if you don't deliver the goods, people will eventually catch on," Trump said, quoted by Goldman.
Expectations remain relatively low for these "Phase 3" AI stocks, but Goldman points out that 84% of this group beat consensus sales estimates in the fiscal third quarter.
- "Protect the downside."
The current economy benefits cyclically exposed sectors, and Goldman recommends overweight positions in materials, software and services, and utilities. To quote Trump: "protect the downside and the upside will take care of itself."
The software and services sector is least dependent on macro-developments, while materials is a good value play given its current low valuation, the bank said. Goldman considers utilities as a worthwhile hedge, in case the economy slows down.