The U.S. Stock Market is Declining. Here's Why Goldman Says to Stay Invested Through 2025

U.S. stocks have faced a turbulent start to 2025, shaken by rising Treasury yields after a prolonged bull market left the S&P 500 at elevated valuations. Despite this rocky beginning, Goldman Sachs’ wealth management division remains optimistic, suggesting that long-term investors should maintain their positions in U.S. equities.

‍

Rising Yields and High Valuations

The S&P 500, which dropped sharply on Friday to 5,827.04, is down 0.9% year-to-date. This retreat followed a strong U.S. jobs report, which pushed the yield on the 10-year Treasury note to 4.772%, the highest level since November 2023. Other major indices have also declined, with the Dow Jones Industrial Average falling 1.4% and the Nasdaq Composite retreating 0.8% this year.

‍

While these declines come after remarkable gains in the past two years—23.3% in 2024 and 24.2% in 2023—Goldman Sachs acknowledges the high valuations currently characterizing the U.S. equity market. The bank’s investment strategy group noted that 60% of the S&P 500’s price return last year stemmed from an expansion of its price-to-earnings (P/E) ratio, not earnings growth. This has pushed the index into its 10th decile of valuation, meaning it is more expensive than 90% of its history since World War II.

‍

Despite historically high valuations, Goldman Sachs argues that selling stocks based solely on this metric is unwise. “Valuations alone are not a good signal for exiting the market,” the bank’s investment strategy group, led by Sharmin Mossavar-Rahmani, stated in its 2025 outlook report.

‍

They emphasized the lack of evidence supporting mean reversion in equity valuations, suggesting that elevated levels could persist longer than anticipated.

‍

Goldman forecasts that the S&P 500 will close 2025 at 6,200–6,300, representing a potential 5% to 7% increase from the end of 2024. When factoring in dividends, the bank estimates total returns of 7% to 8% for the year. This projection is supported by a base-case scenario in which the U.S. economy grows at a rate of 2.3%, avoiding a recession.

‍

Economic Expansion and Earnings Growth

Goldman’s investment strategy group places an 80% probability on the U.S. economy continuing to expand this year, leaving only a 20% chance of recession. Brett Nelson, head of tactical asset allocation at Goldman, described these odds as “difficult to overcome” when considering an underweight position in U.S. equities. He also noted the lack of a clear relationship between starting valuations and returns over a one-year horizon.

‍

The bank expects corporate earnings growth to drive equity returns in 2025. They forecast the S&P 500’s earnings per share to rise by about 10%, reaching $265. Combined with a dividend yield of 1.3% and a slight compression in the P/E ratio, Goldman’s outlook suggests high single-digit total returns for the index.

‍

The yield on the 10-year Treasury note has climbed sharply in recent months, even as the Federal Reserve has begun cutting interest rates. Historically, bond yields tend to fall initially during a rate-cutting cycle but can rise again if the economy avoids a recession. Goldman’s data, which spans back to 1989, shows that current Treasury yields are already higher than levels seen in past non-recessionary cycles.

‍

Goldman expects modest declines in bond yields from their current elevated levels. The bank’s investment strategy group forecasts the 10-year Treasury yield will end the year in a range of 4.10% to 4.60%. They believe this outlook is supported by the likelihood of additional Fed rate cuts, as the central bank aims to align its policy rate with the neutral level.

‍

While high valuations leave the U.S. stock market vulnerable to downside risks, Goldman believes equities will outperform intermediate-duration U.S. bonds and cash in 2025. Investors who exit the market based solely on valuation concerns risk missing out on potential returns. The bank’s analysis underscores that long-term gains are more closely tied to economic growth and earnings expansion than to short-term valuation metrics.

‍

Moreover, the investment strategy group highlighted the resilience of the U.S. stock market during periods of economic expansion. They remain confident in their forecast, emphasizing the strong historical performance of equities during growth phases.

‍

Conclusion

Goldman Sachs’ 2025 outlook underscores the importance of staying invested in U.S. equities despite elevated valuations and rising bond yields. While the market’s “spirited climb” over the past two years has pushed valuations into uncharted territory, the bank believes that economic expansion and corporate earnings growth will support continued gains. With a forecast for the S&P 500 to deliver high single-digit total returns and bond yields expected to decline modestly, Goldman advises investors to focus on long-term fundamentals rather than short-term market fluctuations.

‍