Why Goldman Sachs Analysts See Risk Of A Massive 30% Correction In The Stock Market In 2025

There is a saying in Vegas that "everyone loves a gambler until they lose," and if you've ever seen crowds gather around a player with a hot hand, you know it's true. Unfortunately, the other side of playing a hot hand is the inevitability of it running just as cold. Goldman Sachs analysts have been examining the stock market and they believe it's so overheated that a 30% correction might be in the cards. 

Like all investment firms, Goldman Sachs has analysts who analyze stock market data to try to predict major downturns that could harm Goldman's and its clients’ holdings. Although overheated markets always carry an elevated risk of a major correction, Goldman sees an additional threat: the potential impact of uncertainty surrounding the incoming Trump administration's economic policies.

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Goldman's data shows that the risk level has increased sharply since September 2024. The specific data points they've used to track that risk include: 

·      Overall U.S. economic growth

·      Inflation (which may be on the rise again and could halt the Federal Reserve's rate cuts)

·      American economic policy

·      Market-wide increased valuation of equities (stock prices) 

Speaking for a team of Goldman Analysts, Andrea Ferrario said, "Market variables have contributed the most to the increase in inflation momentum, with both commodity prices and U.S. breakeven inflation increasing over the past few months." Goldman's report highlights that the Trump Administration's tariff policies will affect global trade as being at the "epicenter" of the growing uncertainty. 

They also note that uncertainty over European economic policy elevates the risk of a major correction. Like the Federal Reserve, the European Central Bank spent 2024 trying to stave off inflation by managing interest rates. Goldman says the uncertainty in the European region is at an "all-time high" and has already caused a pullback in the valuation of European equities.

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Ferrario underscored that threat by saying, "While the predictive power of policy uncertainty for equity drawdowns has been mixed, with elevated policy uncertainty and geopolitical risks, there is potential for setbacks that are very difficult to anticipate." Goldman's analysts, who have been tracking the risk of global drawdowns since 1950, assess that the current risk of almost 30% raises alarms internally. 

Since Goldman began tracking drawdown risk, the biggest pullbacks and corrections have occurred when their data showed the risk factor as being over 35%. Although their risk rating is currently lower than that, it's inching closer to the danger zone. If, for example, Trump's tariffs elevate the end price of consumer goods beyond affordability, publicly traded companies that manufacture and sell those goods could see significant profit losses.

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That would certainly put much downward pressure on stocks, but the risk is particularly high in the tech sector. The Nasdaq and S&P 500 spent much of 2024 surging on the strength of tech stocks like Nvidia, but it wasn't the only one. Stocks in multiple sectors have profited as AI has created strong demand for data center real estate and high-performance chips or semiconductors. 

If the tariffs drive prices up for those products, stock prices for several "Magnificent Seven" members and Nasdaq favorites would likely suffer severely. It's no secret that many institutional investors, retail investors and large funds are heavily invested in tech stocks. That paid off in 2024, but it's not impossible to imagine a major pullback in stock values if the proposed tariffs wreak havoc on the tech and consumer goods sectors. 

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