Odd Lots• Dec 2, 2024• 53:53Interview

Goldman's Hatzius and Kostin on Markets and Macro in 2025 | Odd Lots

From Odd Lots

Jan Hatzius and David Kostin•Chief Economist and Chief U.S. Equity Strategist, Goldman Sachs

Executive Summary

Goldman Sachs presents a bullish base case for 2025, forecasting the S&P 500 to reach 6,500, driven by strong earnings and above-consensus U.S.
GDP growth of 2.5%.
The core economic outlook anticipates a successful soft landing, with inflation returning to the Fed's 2% target (excluding tariff impacts) and the terminal Fed Funds Rate settling in the low-to-mid 3% range.
Significant policy uncertainty, particularly the high probability of increased U.S.
tariffs on China and other trading partners under a new Trump administration, represents the primary risk to the forecast.
The equity market is expected to broaden, with the significant earnings growth gap between the Magnificent Seven and the rest of the S&P 500 forecast to narrow substantially in 2025.

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Concerns Raised

High degree of policy uncertainty from the incoming Trump administration, particularly regarding tariffs.
The risk of retaliatory tariffs from China and other trading partners impacting U.S. companies with international sales.
Elevated U.S. equity market valuations, with the S&P 500 trading at a high forward P/E multiple of 23x.
The U.S. federal deficit is expected to remain high at around 6% of GDP, well above aspirational political targets.

Opportunities Identified

A broadening of the equity market rally as the earnings growth gap between mega-caps and the rest of the market narrows.
A significant 25% increase in M&A activity is forecast for 2025, creating event-driven investment opportunities.
The Federal Reserve is expected to continue cutting rates, with the terminal rate potentially settling below current market expectations.
Investing in U.S. companies with primarily domestic customer bases to hedge against potential retaliatory tariffs.

Key Themes

Constructive U.S. Macro Outlook

Goldman Sachs maintains an optimistic view on the U.S. economy, forecasting robust GDP growth of 2.5% in 2025, which is significantly above consensus. This is underpinned by a belief in the continuation of the soft landing, with core inflation expected to normalize back to 2% by year-end, allowing the Federal Reserve to continue its rate-cutting cycle.

This above-consensus growth forecast provides a strong fundamental underpinning for corporate earnings and asset prices, suggesting the U.S. economy remains resilient despite higher interest rates and global uncertainties.

Policy Uncertainty as the Dominant Risk

The primary focus for investors has shifted from the underlying economy to policy uncertainty associated with the incoming Trump administration. The most significant anticipated policy is a sharp increase in tariffs on Chinese goods, with potential for new tariffs on European and Mexican imports as well.

This policy shift introduces significant variability and potential shocks to inflation, corporate supply chains, and global trade dynamics, representing the key risk factor that could derail the otherwise positive economic forecast.

Equity Market Broadening and Valuation

While the S&P 500 is forecast to continue its ascent, the market's high forward P/E multiple of 23x reflects much of the good news. A key dynamic expected in 2025 is the narrowing of the performance and earnings growth gap between the mega-cap tech stocks and the rest of the S&P 500, suggesting a potential rotation and broadening of the market rally.

Investors may need to look beyond the largest stocks for outperformance in 2025, creating opportunities in other sectors as the market leadership becomes less concentrated.

Long-Term U.S. Growth Potential

Goldman Sachs has raised its long-term potential GDP growth forecast for the U.S., citing structural factors like the productivity impact of AI and increased labor supply from immigration. This more optimistic structural view contrasts with the Federal Reserve's more conservative estimates.

A higher potential growth rate for the U.S. economy supports higher equity valuations over the long term and suggests a greater capacity for non-inflationary growth, influencing long-term asset allocation decisions.

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Topics

2025 Outlook S&P 500 Economic Forecast Goldman Sachs GDP Growth Inflation Federal Reserve Monetary Policy Tariffs US-China Relations Trade Policy Trump Administration Equity Strategy Market Valuation Magnificent Seven M&A Fiscal Policy

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