A perfect, profitable market environment may not last much longer as investors deal with rising bond yields, inflated valuations and uncertainty about further rate cuts.
That’s a new warning from Goldman Sachs on Thursday.
“The powerful rally in stock prices in recent months has stocks priced for perfection,” Goldman Sachs strategist Peter Oppenheimer said in a 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 by further rises in bond yields and/or disappointments in economic data growth or the profits.”
While Oppenheimer isn’t predicting a short-term correction (loosely defined as a 10% decline from a high) in stocks, he offers three plausible reasons for investors to perhaps take a little less risk in their portfolios right now.
Read more: The former CEO of TD Ameritrade makes his 2025 market forecast
For starters, Oppenheimer argues, the speed of recent stock price gains likely reflects much of the good news Wall Street expects about 2025 growth.
Concerns that strong future growth are already being reflected in valuations could be raised this week at market darling Nvidia (NVDA), a stock that has exploded 185% in the past year.
Investors were hungry for more after CEO Jensen Huang’s closely watched CES keynote on Monday evening. In response, the stock had its worst day since September 3 on Tuesday.
Other richly valued momentum names like Palantir (PLTR) and AMD (AMD) have sold off more than 10% in the past month as traders consider higher interest rates among other factors.
“You could look at names like Palantir, Tesla (TSLA), some of the sell-offs we’re seeing — I think we’re just going to see white knuckles for the next six months,” said Wedbush analyst Dan Ives. said on Yahoo Finance’s Opening Bid podcast (video above; listen below). “Trump headline risk, tariffs, 10-year government bonds if they go to 5% and what this means for the Fed [are all risks] – and so I think we’ll see some of that [volatility].
Oppenheimer also points out that high stock valuations are likely to limit future returns.
Goldman’s research found that it is “extremely difficult” for companies to maintain high sales and profit margin levels for extended periods. This thus sets the stage for investors to be let down by performance and choose to sell shares. Stocks are also likely to face “fierce competition” from other assets over the next decade (see bitcoin).
