A perfect, money-making market backdrop may not continue for much longer as investors digest rising bond yields, bloated valuations and uncertainty over further interest-rate cuts.
That a fresh warning on Thursday from Goldman Sachs.
“The powerful rally in equity prices in recent months leaves equities priced for perfection,” contends Goldman Sachs strategist Peter Oppenheimer in note to clients. “While we expect equity markets to make further progress over the year as a whole — largely driven by earnings — they are increasingly vulnerable to a correction driven either by further rises in bond yields and/or disappointments on growth in economic data or earnings.”
Although Oppenheimer stops short of predicting a near-term correction (loosely defined as a 10% pullback from a high) in stocks, he offers up three plausible reasons for investors to perhaps lighten up on risk in their portfolio right now.
Read more: TD Ameritrade’s former CEO makes his 2025 market prediction
For starters, points out Oppenheimer, the speed of the recent rises in stock prices likely reflects much of the good news that Wall Street is expecting on growth in 2025.
Concern that strong future growth is already reflected in valuations could be seen this week with market darling Nvidia (NVDA), a stock has exploded 185% in the past year.
Investors were left yearning for more from CEO Jensen Huang’s closely watched CES keynote on Monday evening. In response, the stock on Tuesday notched its worst day since Sept. 3.
Other richly valued momentum names such as Palantir (PLTR) and AMD (AMD) have sold off more than 10% in the past month as traders price in a more elevated interest-rate backdrop — among other factors.
“You could look at names like Palantir, Tesla (TSLA), some of the sell-offs that we’re seeing — I think broadly we’re just going to see some white knuckles in the next six months,” Wedbush analyst Dan Ives said on Yahoo Finance’s Opening Bid podcast (video above; listen in below). “Trump headline risk, tariffs, 10-year Treasury as it goes to 5% and what does it mean for Fed [are all risks] — and so I think we’re going to see some of that [volatility].
Oppenheimer also points out that high valuations for stocks are likely to limit forward returns.
Goldman’s research found that it’s “extremely difficult” for companies to maintain high levels of sales and profit margins over sustained periods of time. Therefore, that sets the stage for investors to be let down by performance and opt to sell stocks. Stocks are also likely to face “stiff competition” from other assets (see bitcoin) during the next decade.
Goldman estimates the S&P 500 (^GSPC) will have a total return of only 3% over the next decade. This return would rank in the seventh percentile of 10-year returns since 1930, Goldman’s data shows.
And lastly, Oppenheimer reasons that “unusually high market concentration increases portfolio risks.”
The strategist is particularly concerned that the five biggest stocks in the US — Apple (AAPL), Nvidia, Microsoft (MSFT), Alphabet (GOOG, GOOGL), Amazon (AMZN) — make up about a quarter of the S&P 500. That concentration raises the prospect for a broader market correction if any of these companies disappoint on their results or trading conditions go risk off.
Globalt Investments senior portfolio manager Keith Buchanan thinks that continued dominance of growth stocks could make the market more “top-heavy than it is.”
“If the economy doesn’t hold up and consumer spending doesn’t continue… growth, in our opinion, is extremely vulnerable as the economic stress would hit those highest valuation names most certainly the quickest,” Buchanan warned on Yahoo Finance’s Catalysts.
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Brian Sozzi is Yahoo Finance’s Executive Editor. Follow Sozzi on X @BrianSozzi, Instagram and on LinkedIn. Tips on stories? Email brian.sozzi@yahoofinance.com. Three times each week, Sozzi fields insight-filled conversations with the biggest names in business and markets on Yahoo Finance’s Opening Bid podcast. Find more episodes on our video hub. Watch on your preferred streaming service. Or listen and subscribe on Apple Podcasts, Spotify, or wherever you find your favorite podcasts.
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