Stocks are priced for ‘perfection’ and more vulnerable to a correction, Goldman warns

A perfect money-making market backdrop may not continue for much longer as investors digest rising bond yields, bloated valuations, and uncertainty over further interest rate cuts.

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That was a fresh warning on Thursday from Goldman Sachs.

“The powerful rally in equity prices in recent months leaves equities priced for perfection,” Goldman Sachs strategist Peter Oppenheimer wrote in a note to clients. “While we expect equity markets to make further progress over the year as a whole — largely driven by earnings — they are increasingly vulnerable to a correction driven either by further rises in bond yields and/or disappointments on growth in economic data or earnings.”

Although Oppenheimer stopped short of predicting a near-term correction (loosely defined as a 10% pullback from a high) in stocks, he offered up three plausible reasons for investors to perhaps lighten up on risk in their portfolio right now.

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For starters, Oppenheimer pointed out that the speed of the recent rises in stock prices likely reflects much of the good news that Wall Street is expecting on growth in 2025.

Concern that strong future growth is already reflected in valuations could be seen this week with market darling Nvidia (NVDA), a stock that has exploded 185% in the past year.

Investors were left yearning for more from CEO Jensen Huang’s closely watched CES keynote on Monday evening. In response, the stock on Tuesday notched its worst day since Sept. 3.

Other richly valued momentum names such as Palantir (PLTR) and AMD (AMD) have sold off more than 10% in the past month as traders price in a more elevated interest rate backdrop — among other factors.

“You could look at names like Palantir, Tesla, some of the sell-offs that we’re seeing — I think broadly we’re just going to see some white knuckles in the next six months,” Wedbush analyst Dan Ives said on Yahoo Finance’s Opening Bid podcast (see video above; listen below). “Trump headline risk, tariffs, 10-year Treasury as it goes to 5% and what does it mean for Fed [are all risks] — and so I think we’re going to see some of that [volatility].

Oppenheimer also pointed out that high valuations for stocks are likely to limit forward returns.

Goldman’s research found that it’s “extremely difficult” for companies to maintain high levels of sales and profit margins over sustained periods of time. Therefore, that sets the stage for investors to be let down by performance and opt to sell stocks. Stocks are also likely to face “stiff competition” from other assets (see bitcoin) during the next decade.

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