Looking back at the just-passed year of 2024, the US stock market was truly brilliant, $S&P 500 Index (.SPX.US)$ securing an increase of about 23%. However, after the crazy rise, crises began to emerge.

Goldman Sachs warned on Thursday that the USA stock market will face a series of risks in 2025, which increases the likelihood of a significant market correction at some point this year.

The bank pointed out in a report to clients that certain factors make the market more susceptible to a pullback. This indicates that, despite an optimistic outlook for interest rate cuts this year and a soft landing for the USA economy, the risk of a stock market decline is increasing.

"Although the (macroeconomic) background is favorable, as we enter 2025, the dynamics of the stock market are complicated due to three main factors," the strategist wrote.

Goldman Sachs believes that the risk of a stock market decline is increasing and has listed the following three reasons.

1. The US stock market is expected to rise significantly in 2024.

Goldman Sachs strategists state that the US stock market currently appears to be "perfectly priced" and may disappoint investors without too much bearish sentiment.

The bank noted that the S&P 500 Index is expected to record an increase of over 20% for the second consecutive year in 2024.

Over the past two years, the S&P 500 Index has seen one of its best increases since 1928, which may indicate limited upward potential in the stock market.

"Although we expect the stock market to continue to rise throughout the year—mainly driven by corporate earnings—it has become increasingly susceptible to corrections driven by further increases in bond yields and/or disappointing economic data or corporate earnings growth."

2. The US stock market is overvalued.

Goldman Sachs strategists also pointed out that the high valuations in the US stock market reduce the likelihood of high returns in the coming year.

Goldman Sachs' analysis shows that a significant portion of last year's stock market rally was due to rising valuations. Of the 493 component companies in the S&P 500 Index (excluding the top seven tech stocks in the market), rising valuations accounted for nearly half of all returns.

The valuation of the US stock market is at a 20-year peak, even when excluding the largest technology companies, according to Goldman Sachs. The performance in recent months, combined with high valuations, suggests that the stock market ROI will be lower in 2024.

Goldman Sachs pointed out that the higher valuations have drawn attention to the disconnect between the stock market and interest rate expectations.

In recent months, due to traders expecting that interest rates will remain high for a longer period, bond yields have continued to rise. However, this has not hindered stock prices from increasing, with the S&P 500 Index rising by 6% in the past six months.

However, stock prices continue to rise in the context of increasing bond yields, which has further reduced the risk premium of the stock market. If bond yields rise further, the stock market has almost no buffer.

3. High market concentration or increased portfolio risk.

Goldman Sachs stated that the returns of the US stock market have been highly concentrated in a small portion of the market, which makes investors more likely to react strongly to bearish trends in these areas.

In 2024,$NVIDIA (NVDA.US)$、 $Apple (AAPL.US)$ 、$Amazon (AMZN.US)$、 $Alphabet-C (GOOG.US)$ and$Broadcom (AVGO.US)$Account for 46% of the total return of the S&P 500 Index.

According to Goldman Sachs' analysis, the earnings growth of the 'Magnificent 7' in the US stock market is expected to reach around 33% in 2024, while the earnings growth of other components in the S&P 500 Index is expected to be only 3%.

Goldman Sachs pointed out that the market's excessive concentration has exacerbated the vulnerability of US stocks in the face of disappointing earnings growth.

Concerns on Wall Street are intensifying.

Goldman Sachs is not the only company that holds a cautious attitude towards US stocks. As traders increasingly focus on the risks of rising inflation in the USA and escalating debt turmoil, Wall Street's worries about a pullback in US stocks are intensifying.

Market research firm BCA Research stated earlier this week that the risk coming from 'animal spirits'—the strong optimism of investors towards the US stock market—is spreading in the market. This bullish sentiment could be detrimental to the market, as the so-called 'animal spirits' may drive up inflation and keep interest rates elevated for a longer period.

One of Wall Street's notable bears, Michael Wilson, the Chief Investment Officer of Morgan Stanley, stated this week that this year's performance of US stocks will be divided into two halves, with the market experiencing a difficult few months before investors feel the changes in policy. He pointed out that rising bond yields and a strengthening dollar will pose risks to the US stock market in the first half of this year.

Editor/rice