Goldman Sachs has released a new sector model advising investors to position defensively, even as Wall Street prices are in near-record optimism for economic growth in 2025. The firm identifies utilities and healthcare as key sectors poised for gains, thanks to attractive valuations and potential tailwinds from technological and economic trends.

Key Insights from Goldman Sachs’s Model

  1. Economic Optimism Favoring Cyclicals:
    • Wall Street’s expectations for strong GDP growth in 2025 have propelled cyclicals, excluding commodities, to outperform defensives by five percentage points since Election Day.
    • Goldman Sachs analysts caution that these expectations may already be fully priced in, leaving defensive sectors better positioned for attractive risk-reward returns.
  2. Utilities Poised for AI-Driven Growth:
    • Utilities stand out due to their defensive nature and exposure to the AI boom. With AI data centers driving unprecedented electricity demand, utility earnings, particularly among unregulated companies, are expected to grow significantly.
    • Bernstein Research estimates that electricity demand from data centers will outpace supply within two years, further benefiting the sector.
  3. Healthcare’s Low Valuations:
    • Healthcare stocks are trading at historically low valuations, with a forward price-to-earnings ratio of 16x, compared to the broader S&P 500 average of 18x.
    • However, uncertainties around Medicaid funding, drug pricing, and leadership changes at the Department of Health and Human Services could introduce risks in the sector.

Sector Recommendations

Goldman Sachs’s model assesses the probability of sectors outperforming the S&P 500 by at least five percentage points over the next six months. Key recommendations include:

  • Overweights:
    • Utilities and Healthcare: Defensive positioning with sector-specific growth drivers.
    • Materials, Software and Services, Real Estate: Cyclical sectors with strong growth potential.
  • Underweights:
    • Industrials and Tech Hardware: Lowest probability of outperforming due to potential overvaluation and market headwinds.

Broader Market Context

The model comes as the US market continues a two-year bull run, with Wall Street expecting an average gain of 11% for the S&P 500 in 2025, following two years of over 20% returns. Cyclicals have led recent rallies, as diminishing fears of recession have driven optimism across financials, commodities, and infrastructure stocks.

However, Goldman Sachs’s focus on utilities and healthcare suggests a more cautious approach to navigating the elevated growth optimism already baked into market prices.

Goldman Sachs’s analysis provides a balanced strategy for investors, blending defensive plays with selective cyclical opportunities, while remaining mindful of policy and economic uncertainties.

Disclosure: This article does not represent investment advice. The content and materials featured on this page are for educational purposes only.