The U.S. stock market is trading at eye-watering valuations after two straight big years for the S & P 500 . But that’s not a good enough reason to back away from domestic companies, according to Goldman Sachs’ Investment Strategy Group. The 2025 outlook for the unit, released Monday, included a model portfolio for moderate risk investors that recommended staying overweight U.S. equities, while trimming exposure to foreign stocks to add some diversification through alternatives, like private equity. The S & P 500 trades at a price-earnings ratio of 27.49, according to FactSet. By comparison, the iShares Core MSCI International Developed Markets ETF (IDEV) is at 15.32, while iShares MSCI Emerging Markets ETF (EEM) is at 14.49. Goldman ISG isn’t denying that the U.S. market is expensive, but is instead taking the stance that 2025 won’t be the year that becomes a problem. “Valuations are not a good timing signal. … There’s no clear relationship between your starting valuation and the returns one year later,” Brett Nelson, head of tactical asset allocation for the group, said at a media event last week. .SPX 5Y mountain S & P 500 is trading at a high valuation relative to earnings after big rallies in 2023 and 2024. To be sure, the high valuations could hurt long-term stock returns even if they don’t have a major impact in 2025. Goldman’s equity strategy team predicted in October that the S & P 500 would return 3% annually over the next decade, down from 13% over the previous 10 years. Part of the reason for the valuation of the U.S. market is the higher rate of earnings growth for major companies compared with other developed markets, like Europe. Goldman projects the U.S. will grow faster than Europe again in 2025, which should in theory flow through to earnings. “We do think that the earnings advantage that the U.S. has will continue,” said Sharmin Mossavar-Rahmani, chief investment officer for the Goldman unit. Another thing to consider is how tech-heavy the U.S. market is. Software companies often trade at higher valuations than industrials, regardless of where a market is located. The S & P 500 has a bigger representation of these types of stocks than other major markets. “Once you make a sector weight adjustment, so you actually know what are you paying for — a similar growing basket from an earnings perspective — you actually see that the discount is not as great as it seems. … You need to compare markets based on similar sector weights,” Mossavar-Rahmani added. The rise of tech in the U.S. also coincides with a time period where valuations in the U.S. appear to have taken a jump. Nelson said there’s been a “structural shift higher” for valuations in the U.S., measured since the end of the dot-com boom, in part because of higher profit margins. To be sure, one complicating factor for 2025 could be the path of interest rates. Goldman’s ISG outlook calls for yields to fall over the course of the year, helped by three Federal Reserve rate cuts. That was already more aggressive than market pricing before Friday’s hot jobs report , which led some on Wall Street to consider that the central bank may be done with its rate cuts.
U.S. stocks are expensive, but Goldman Sachs says investors should keep buying them
