The markets feel a bit like they’re in World War III this morning after Russia said it updated its nuclear policy. It makes sense to wonder why people bother taking precautions against nuclear war, and the idea of “mutually assured destruction” will probably win out in the end.
On a positive note, Goldman Sachs has set a goal price for the S&P 500 SPX of 6,500, assuming that investors are still here at the end of 2025. This is the same price that Morgan Stanley chose as its outlook for the market.
Similarities are seen between this and President-elect Trump’s book “The Art of the Deal.” In that book from 1987, Trump wrote, “Some people have a sense of the market, and some people don’t.” These smart people supported the Magnificent Seven and Trump’s reasoning: “To me it’s very simple: if you’re going to think anyway, you might as well think big.”
The Goldman team says that the Magnificent Seven will still do better than the other 493, but only by 7%. This would be the smallest difference in performance in seven years. “Earnings growth on a “micro” level supports the Magnificent 7 continuing to do better, but “macro” factors like economic growth and trade policy favor the S&P 493. “The prices of both groups of stocks are high compared to the past, but they trade close to their fair value,” they say.
They say investors should allocate the benchmark weight to Magnificent Seven stocks (that grouping is 31% of the S&P 500) while loading up on mid-caps MID -0.36% , which trade at a lower price-to-earnings multiple of just 16 but are expected to grow earnings by as much as large-cap stocks.
The Goldman team says that Art of the Deal can also be used to help with another strategy: making deals, especially mergers and acquisitions. They think that S&P 500 companies will spend 20% more on deals in cash in 2025. Overall mergers and acquisitions will grow at an even faster rate, too, because companies will be able to use their high-value stocks instead of cash. From a list of 62 stocks, they have picked Kinetik Holdings (KNTK 0.40%), Groupon (GRPN -2.52%), Kosmos Energy (KOS -3.09%), Magnolia Oil & Gas (MGY -0.27%), and Electronic Arts (EA 0.11%) as possible businesses to buy.
They also suggest investing in companies that do business with small and medium-sized businesses, like Payoneer Global (PAYO 0.75%), Xometry (XMTR -0.50%), and Toast (TOST 2.79%). They also suggest investing in companies that make money through AI, like HubSpot (HUBS 0.41%), Couchbase (BASE 1.60%), and Q2 Holdings (QTWO 1.70%).
Not all companies are in all three groups, but some are in two. Meta Platforms META 0.17% is one of them.
Another saying from “The Art of the Deal” says “protect the downside and the upside will take care of itself.” Goldman sees this as meaning that they should put more money into materials, software, services, and utilities. The economy as a whole supports cyclicals, but the market has already taken that into account in a big way. They say that software is the least affected by the overall economy, materials has a low starting value, and utilities can protect investors if the economy slows down and bond prices fall.
