Despite the favorable backdrop, the outlook for an ongoing stock rally is complicated by three main factors.
First, the speed of recent gains in stock prices already reflects much of the good news that our analysts are expecting in terms of economic growth. Goldman Sachs Research finds that cyclical parts of the market are outperforming the defensive parts.
“Much of the strength in equities in recent months has reflected higher growth expectations, particularly in the US where optimism on US deregulation and tax cuts have played a role,” Oppenheimer writes. “This leaves equities vulnerable to any growth disappointments, particularly depending on specific policy measures by the incoming US administration in relation to tax and tariff decisions.”
Second, high valuations are likely to limit forward returns. The gains have left the US stock market at its 20-year peak, even after excluding the biggest technology companies. Other markets are much cheaper relative to the US, but their valuations are broadly in line with their long-term averages (outside of China).
The third factor complicating the outlook for global equities is unusually high market concentration — by geography (the US has been increasingly dominant), by sector (technology has generated the bulk of equity returns), and by individual companies (the five biggest stocks in the US account for roughly a quarter of the index).
Stocks are more vulnerable to growth disappointments because of the increased concentration of equity market returns, Oppenheimer writes. The large US technology companies known as the Magnificent 7 rose by 47% last year, versus a 10% gain for the median company in the S&P 500.
Source: goldmansachs.com