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With Wall Street pricing in high levels of economic growth next year, Goldman Sachs's new sector model says to position more defensively.
The analysts say their forecast for above-consensus US economic growth in 2025, plus potential fiscal policy changes, generally supports a tilt toward cyclicals, but the market appears to be pricing in even greater GDP growth.
Case in point, cyclicals, excluding commodities, have outperformed defensives by five percentage points since Election Day, they say.
As a result, defensive sectors like utilities and healthcare in particular are poised to outperform given current prices and the extreme growth optimism already priced into the market more broadly, the analysts say.
"Current market pricing means risk/reward appears more attractive in some defensive sectors, such as utilities, than in many cyclical sectors," the analysts said in a Friday note.
The analysts, led by Goldman's chief US stock strategist, David Kostin, say that utilities stocks are especially poised for gains amid the AI boom, which will generate unprecedented demand for power as AI data centers drive up US electricity usage.
Data centers require massive amounts of power to operate, and their electricity demand is set to surpass supply in just two years, according to a recent estimate from Bernstein Research.
"In addition to its defensive qualities, Utilities is exposed to the AI theme. Utilities earnings should benefit from the power demand associated with AI, especially among unregulated utility companies," the analysts wrote.
Analysts at UBS and JPMorgan have made similarly optimistic calls on the sector, pointing to AI tailwinds and a relatively small impact from tariffs because of its strong US presence.
Healthcare stocks, on the other hand, should benefit from historically low valuations, with a forward price-to-earnings ratio of 16 times compared with 18 times for the typical S&P 500 stock, the analysts say.
They warn, though, that their model doesn't take into account any policy uncertainty potentially impacting the sector.
"Key political debates in 2025 include Medicaid funding, drug pricing, and the nomination of Robert F. Kennedy Jr. to lead HHS," the analysts said. "The path of policy uncertainty during the next six months will be an important determinant of healthcare performance."
The analysts' model, released last week, estimates the probability that an equal-weighted sector will outperform the index by five percentage points or more over the next six months.
In addition to utilities and healthcare stocks, the model also recommends overweights in cyclical sectors like materials, software and services, and real estate, defining "overweights" as sectors with a greater than 50% chance of outperforming.
On the flip side, the model sees industrials and tech hardware stocks with the lowest probability of outperforming in the coming months.
The model's call comes amid near-record market bullishness and diminishing fears of a US recession, which has propelled bets on cyclical stocks. Cyclicals—which include areas like financials, commodities, construction, and infrastructure—tend to outperform when the rest of the economy is strong.
Wall Street expects the market's two-year bull market to continue in 2025, though at a slower pace. After back-to-back years with over 20% returns for the S&P 500, analysts' average 2025 year-end price target forecasts an average gain of around 11% from current levels.
