Goldman Sachs has released its 2025 equity strategy, projecting the S&P 500 will reach 6,500 next year—representing over 10% appreciation from current levels. In an unconventional approach, analysts led by chief US equity strategist David Kostin drew inspiration from President-elect Trump’s 1987 book “The Art of the Deal” to frame their investment recommendations.
The bank’s strategy centers on five key principles for investors:
1. “Think Big” - Broaden Portfolio Exposure: While the Magnificent 7 tech stocks have delivered 148% aggregate returns since late 2022, Goldman expects their outperformance gap versus the rest of the S&P 500 to shrink to its smallest margin in seven years. Investors should benchmark their Magnificent 7 exposure and explore opportunities among mid-cap stocks, particularly those with revenue exposure to small- and medium-sized businesses that could benefit from trade policy and economic growth.
2. “Maximize Your Options” - M&A Exposure: Goldman predicts merger and acquisition activity will surge in 2025, with M&A cash spending expected to increase 20% and an estimated 750 US deals over $100 million to be completed. The bank recommends holding a basket of potential M&A candidates, noting that such stocks outperformed the equal-weight S&P 1500 by 300 basis points during Trump’s first term.
3. “Deliver the Goods” - Artificial Intelligence Phase 3: This represents a critical shift in AI investing strategy. Goldman expects the AI trend to evolve beyond chipmakers and infrastructure providers in 2025. The market will begin uplifting companies that actually monetize AI—primarily in the software and services sector. Key names include Q2 Holdings, Fortinet, and Meta. Notably, 84% of these “Phase 3” AI stocks beat consensus sales estimates in Q3, despite relatively low expectations.
4. “Protect the Downside” - Sector Positioning: Goldman recommends overweight positions in materials, software and services, and utilities. The software and services sector shows the least dependence on macro-developments, materials offers value given current low valuations, and utilities provide a hedge against potential economic slowdowns.
This strategic framework reflects Goldman’s view that 2025 will see a more diversified bull market, with opportunities spreading beyond the mega-cap tech stocks that dominated 2024.
Key Quotes
The Art of the Deal offered readers advice on how to conduct a business negotiation and achieve success as an investor. The author — who has just been re-hired by the American electorate to be the 47th President of the United States — also provides a roadmap for our 2025 US equity strategy recommendations.
Goldman Sachs analysts led by David Kostin used this framing to introduce their 2025 investment strategy, drawing parallels between Trump’s business philosophy and their market outlook for the coming year.
You can’t con people, at least not for long. You can create excitement, you can do wonderful promotion and get all kinds of press, and you can throw in a little hyperbole. But if you don’t deliver the goods, people will eventually catch on.
Goldman quoted Trump’s book to emphasize their AI investing thesis—that the market will shift toward companies that actually monetize AI rather than just promise future potential, marking the transition to “Phase 3” AI stocks.
Protect the downside and the upside will take care of itself.
This Trump quote was used by Goldman to justify their sector recommendations, particularly their overweight positions in materials, software and services, and utilities as hedges against various economic scenarios.
Our Take
Goldman’s “Phase 3” AI framework represents sophisticated market analysis disguised in populist packaging. The real insight here is recognizing that AI hype is giving way to AI accountability. After two years of infrastructure buildout driving chipmaker valuations to stratospheric levels, investors are rightfully asking: where’s the revenue?
The 84% beat rate on sales estimates for Phase 3 AI stocks suggests some companies are already answering that question successfully, yet remain undervalued relative to expectations. This creates an asymmetric opportunity—companies like Fortinet and Meta that are embedding AI into revenue-generating products rather than just spending on AI capabilities.
However, investors should approach cautiously. The transition from infrastructure to monetization isn’t guaranteed to be smooth, and many companies claiming AI revenue may struggle to prove sustainable competitive advantages. The real winners will be those with defensible AI moats, not just AI features.
Why This Matters
This Goldman Sachs outlook signals a pivotal transition in AI investing that could reshape portfolio strategies across the industry. The shift from “Phase 2” infrastructure investments to “Phase 3” monetization represents a maturation of the AI investment thesis—moving from companies building AI capabilities to those generating actual revenue from AI applications.
This matters because it suggests the AI boom is entering a prove-it phase where market rewards will flow to companies demonstrating tangible business results rather than just AI potential. For the broader technology sector, this could mean a rebalancing away from the Magnificent 7’s dominance toward a wider array of software and services companies.
The timing is significant as businesses face mounting pressure to show ROI on massive AI infrastructure investments. Companies that successfully monetize AI through improved products, services, or operational efficiency will likely command premium valuations. This shift also has implications for workers and businesses, as it suggests AI adoption is moving from experimental to production phases, potentially accelerating workplace transformation and competitive dynamics across industries.
Recommended Reading
For those interested in learning more about artificial intelligence, machine learning, and effective AI communication, here are some excellent resources: