The S&P 500 is forecast to return 10% in 2025

The S&P 500 Index of US stocks is forecast to have its third-straight year of gains amid solid economic expansion and steady earnings growth, according to Goldman Sachs Research.

The benchmark index of US equities is projected to rise to 6,500 by the end of 2025, a 9% price gain from its current level and a 10% total return including dividends, David Kostin, chief US equity strategist at Goldman Sachs, writes in the team's report. Earnings are predicted to increase 11% in 2025 and 7% in 2026.

What's the outlook for the S&P 500 in 2025?

Corporate revenue growth (at the index level) typically moves in line with nominal GDP growth, according to Goldman Sachs Research. Our strategists' estimate of 5% sales growth for the S&P 500 is consistent with our economists' forecasts for 2.5% real GDP growth and for inflation to cool to 2.4% by the end of next year.

The incoming administration of President-elect Donald Trump is expected to introduce trade policy that includes targeted tariffs on imported automobiles and select imports from China while also cutting taxes. "The impact of these policy changes on our earnings-per-share forecasts roughly offset one another," Kostin writes.

Goldman Sachs Research's S&P 500 EPS forecasts for 2025 and 2026 are $268 and $288, in line with the median top-down consensus estimates of $268 and $288. However, these are below the bottom-up consensus (based on individual company earnings estimates made by equity analysts) of $274 and $308.

At the same time, valuations are high by historical standards and may be a risk for investors. The P/E multiple of the S&P 500 index has increased by 25% during the past two years. Today, the P/E multiple equals 21.7x and ranks at the 93rd historical percentile. At the end of 2022, the index traded at a multiple of 17x.

What are the main risks to US stocks next year?

"An equity market that is already pricing an optimistic macro backdrop and carrying high valuations creates risks heading into 2025," Kostin writes. High multiples are weak signals for near-term returns, but typically increase the magnitude of market downturns when there's a negative shock, he writes.

According to Goldman Sachs Research's baseline macroeconomic outlook, the economy and earnings continue to grow and bond yields remain around current levels in the coming years. But there are a number of risks heading into 2025, including the potential threat of an across-the-board tariff and the potential of higher bond yields. At the other end of the spectrum, a friendlier mix of fiscal policy or more dovish policy from the Federal Reserve could result in higher returns.

"As a result, we believe investors should take advantage of periods of low volatility to capture equity upside or hedge downside through options," Kostin writes.

What's the outlook for the Magnificent 7?

The Magnificent 7 tech stocks are expected to continue to outperform the rest of the index next year - but by only about 7 percentage points, the slimmest such margin in seven years.

The superior earnings growth of the Magnificent 7 has driven the collective outperformance of these stocks compared with the balance of the S&P 500 index. But consensus expectations predict the gap in earnings growth between the Magnificent 7 and the S&P 493 will narrow from an estimated 30 percentage points this year, to 6 percentage points in 2025, and to 4 percentage points in 2026.

Although earnings continue to weigh in favor of the Magnificent 7, macro factors such as growth and trade policy lean towards the S&P 493. Our economists' expectation of a steady and above-trend pace of US growth in 2025 favors the performance of the S&P 493, which is more sensitive to changes in growth compared with the Magnificent 7.

Trade policy risk also favors the S&P 493, which has a greater share of earnings derived domestically relative to the Magnificent 7. Our economists note that trade friction represents an important risk for their baseline forecast. In particular, more restrictive US trade policy would likely affect non-US growth more acutely compared with US growth. The Magnificent 7 derive nearly half of their sales from outside the US compared with 26% for the S&P 493.

Mid-cap stocks could be an opportunity for investors, Kostin writes. The S&P 400 has a long track record of outperformance versus large- and small-cap stocks, similar consensus earnings growth as large-caps, and trades at a lower absolute P/E multiple (16x).

What is the outlook for M&A?

As the US economy and corporate earnings grow, and as financial conditions become relatively looser, our analysts expect increased M&A activity in 2025. Renewed merger activity should be aided by the potential for less regulation in certain industries during the incoming Republican administration.

Goldman Sachs Research forecasts approximately 750 completed US M&A transactions above $100 million in 2025, a 25% year-on-year increase from 2024. Firms are likely to boost cash M&A spending by 20% to $325 billion in the coming year. Total merger volume should increase by an even greater amount because elevated stock valuations make share consideration an attractive alternative to cash," Kostin writes

Where does AI investment go next?

Investor views on the impact of AI continue to vary widely, Kostin writes, with some market participants believing in the transformative power of generative AI and others skeptical that companies can generate attractive returns on their high AI investment.

In 2025, our analysts expect investor interest in AI to transition from AI infrastructure to a broader AI "Phase 3" of application rollout and monetization. This phase refers to companies that are likely to see AI-enabled revenues, beyond those that build the infrastructure underlying AI.

These phase 3 companies include software and services firms, which offer investors longer-lasting, secular growth, and which are relatively less reliant on changes in economic expansion or interest rates to drive share prices.

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