Eric Schultz/AP
If you're looking to outperform the stock market in 2025, Goldman Sachs has a strategy for you: take advantage of the imminent boom in M&A activity in corporate America and invest in companies likely to engage in mergers and acquisitions.
M&A activity surged in 2021 as the economy emerged from the pandemic downturn. Companies had cash sitting on the sidelines that they were itching to deploy, and easy monetary policy created an attractive buying environment. Dealmaking activity then sharply declined as the market overheated, regulatory scrutiny increased, and macroeconomic concerns emerged.
After the last couple of years of anemic transaction volumes, word on the street is that deal activity is back. The market could be poised for an M&A "supercycle" as pent-up demand gets released next year, Goldman says.
Q3 bank earnings certainly are pointing in that direction. Investment-bank revenue spiked 30% on average at big banks such as Goldman Sachs, JPMorgan, Bank of America, Citigroup, and Morgan Stanley this past quarter.
In a recent note, Goldman's Chief US Equity Strategist David Kostin predicted that M&A deal activity would increase by 25% in 2025 on the back of a strong economy, robust earnings growth, and favorable monetary policy. Encouraged by these indicators, CEOs have newfound optimism to engage in M&A activity.
President-elect Donald Trump is a big reason why, said the bank. Over the last four years, the regulatory environment under President Biden has been hostile to M&A activity. Lina Khan, the chair of the Federal Trade Commission, has blocked dozens of deals, including the proposed $25 billion merger of grocery store chains Kroger and Albertsons earlier this year. As a result, CEOs have been discouraged from partaking in dealmaking activity. Now, it's looking likely that Trump will replace Khan with a more pro-business pick.
Don't just take Goldman's word for it, though. Apollo's Chief Economist Torsten Sløk believes "Fed cuts, tight credit spreads, and higher animal spirits will boost M&A and IPO activity over the coming quarters." Lower rates mean lower cost of capital, making it cheaper to finance transactions.
Bank of America analysts are also bullish on the M&A outlook for 2025. The effect could be particularly pronounced in the financials sector, which is set to benefit from Trump's deregulatory stance. "Bank M&A has been over 50% higher under Republican administrations than under Democrats," wrote Jill Hall, equity and quant strategist at Bank of America.
In fact, the uptick in M&A activity might already be here: annualized deal activity has increased 5% year-over-year in October, the highest level since 2021, according to Hall.
With a Trump presidency, the likelihood of large-scale M&A transactions is expected to increase. Goldman forecasts that 2025 will see roughly 750 deals completed at valuations over $100 billion apiece.
One strategy to capitalize off of the imminent boost to M&A activity is to own a basket of stocks likely to be acquired in the near term, according to Goldman Sachs.
An M&A announcement typically leads to a surge in the target company's price. In the long run, the combined company's stock price also tends to rise. When two companies combine, they often realize synergies and operating efficiencies, leading to higher earnings per share and encouraging investor optimism.
For the last decade, the bank's analysts have screened for stocks likely to engage in M&A activity and assigned them a number. A score of 1 denotes a high, or 30-50% chance, of engaging in M&A activity within the next 12 months. A score of 2 denotes a medium or 15-30% chance. Since 2015, the bank's picks have had an average M&A hit rate of 9%, exceeding the S&P 1500 hit rate of just 2%.
During the first Trump administration, Goldman's US M&A Candidates basket returned 15% annually, outperforming the equal-weight S&P 1500 index's return of 12%. And in the first week after Trump's reelection, the basket returned 5.7% compared to the index's 4.5%.
"We know this strategy significantly outperformed during the first Trump administration. Our expectation is with a less activist regulatory environment, this could be an opportunity for these stocks to outperform," Kostin said.
Below are 11 publicly traded stocks that Goldman Sachs has assigned a high chance of being acquired within the next year.
