Investing.com -- Peter Oppenheimer, chief global equity strategist at Goldman Sachs (NYSE:GS), projects slower equity market returns in 2025 following a strong rally that has significantly boosted valuations.
In a note titled "2025 Outlook: The Year of the Alpha Bet," Oppenheimer emphasized that while the economic backdrop remains supportive, equity markets may struggle to replicate recent gains.
"We are entering a benign part of the cycle; interest rate cuts that coincide with economic growth tend to be supportive for equities," Oppenheimer said.
However, he noted that global equities have already risen 40% since October 2023, leaving them "more vulnerable to any disappointments."
The sharp rally, driven by optimism around peak inflation and a Federal Reserve pivot, has pushed valuations higher, limiting further upside potential.
"Equity valuations have increased and leave little room for further valuation expansion," Oppenheimer explained. He added that Goldman Sachs expects "index returns to be driven largely by earnings growth" rather than additional valuation gains.
For 2025, Oppenheimer forecasts total equity returns in U.S. dollars of approximately 10%. However, he cautioned that recent performance, including the Nasdaq's over 50% climb and Nvidia (NASDAQ:NVDA)'s staggering 264% surge, sets a high bar for future gains.
Given elevated valuations and concentrated market leadership, Goldman recommends a diversified investment strategy to enhance risk-adjusted returns.
"We prefer a more eclectic mix of sector and styles with an increase in focus on Alpha relative to Beta," Oppenheimer said, adding that key themes include market broadening opportunities, selective value plays, geographical diversification, and increased capital market activity.
As Oppenheimer concluded, "It is tempting, as we approach a new year, to assume that the clock resets, and we start anew. While it is true that performance is typically measured in yearly increments, it is also important to recognize that context matters."
He highlighted that 2025 follows an extraordinary market upswing rather than a period of depressed valuations.