Goldman Sachs has outlined three potential scenarios for the stock market broadening as the bull market enters its fourth year. In a note to clients released late last week, the investment bank’s portfolio strategy team analyzed how the recent shift toward broader market participation could unfold in 2025, with each path determined by different valuation and earnings dynamics across the market.
The analysis comes as market breadth has improved significantly in recent months, with previously underperforming sectors beginning to outpace technology giants. According to Goldman Sachs, the equal-weighted S&P 500 has gained 4% year-to-date, compared to just 1% for the traditional market-cap-weighted index, signaling a notable shift in investor preferences.
Three Scenarios for Market Broadening
Ben Snider and his team of strategists identified three distinct paths based on historical precedents. The first scenario, described as a “catch down” outcome, would mirror the dot-com correction of 2001 when valuations of the largest technology companies collapsed dramatically.
However, Goldman considers this scenario unlikely. The bank noted that tech stocks currently trade at a forward price-to-earnings ratio of approximately 27, which represents a valuation premium in the 24th percentile relative to the past decade. “Instead, we expect the elevated recent dispersion in mega-cap tech valuations and returns will persist,” the strategists wrote.
Valuation Expansion Across Broader Market
The second possibility involves a “catch up” scenario where valuations surge across the rest of the market. This outcome would be supported by accelerating economic growth during the Federal Reserve’s easing cycle, conditions that have historically driven the equal-weighted S&P 500 valuations higher by 10% to 15% over 12-month periods since 1980.
Nevertheless, Goldman’s analysis suggests this path also faces headwinds. The equal-weighted index currently trades at a price-to-earnings multiple around 17, placing it in the 95th percentile of valuations since 1990. “A dramatic ‘catch up’ increase in valuations across the market also appears unlikely,” strategists stated, noting that current valuations already exceed fair value based on macroeconomic fundamentals.
Earnings-Driven Rally Most Likely
Goldman’s preferred scenario involves continued market broadening powered primarily by corporate earnings growth rather than valuation expansion. In this outcome, the “average stock” would see earnings outperform relative to mega-cap companies, similar to the pattern observed in 2021.
This earnings-driven path aligns with Wall Street expectations for robust profit growth in 2025. Analysts forecast the S&P 500 will deliver 15% annual earnings-per-share growth this year, while the equal-weighted index is projected to achieve 10% earnings growth, representing the most aggressive growth rates in recent memory.
Additionally, Goldman’s forecast for economic acceleration in early 2026 supports this third scenario as the most probable near-term outcome. The strategists emphasized that “the ultimate degree of equity market broadening will depend on the degree of earnings broadening,” though they cautioned about a potentially limited runway as economic growth could decelerate in the second half of the year.
The investment bank will continue monitoring earnings reports and economic indicators throughout 2025 to assess which scenario materializes, though the timeline for clarity remains uncertain given ongoing macroeconomic volatility.
