Goldman Sachs Forecasts 11% S&P 500 Profit Growth Next Year

Goldman Sachs Group Inc. strategists led by Ben Snider argue that concerns regarding a US earnings bubble are unfounded. The bank attributes recent corporate performance to a robust economic outlook and artificial intelligence adoption, rather than unsustainable one-off factors. This view challenges the narrative that S&P 500 profits have detached from fundamental realities.

Data from Bloomberg Intelligence shows that S&P 500 firm profits jumped approximately 30% in each of the first two quarters, marking some of the strongest showings on record. Full-year expectations are currently the highest since the post-pandemic rebound in 2021. Goldman’s strategy team expects this growth pace to decelerate in future years but rejects the possibility of an outright collapse, suggesting a normalization rather than a break in the trend.

AI Drives Current Profit Surge

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However, the Goldman team notes that the boost from AI investments is expected to fade beginning in 2027. Even as capital spending continues to rise, the direct impact on profit margins will diminish. Snider specifically expects the pace of profit-margin expansion at semiconductor-related firms to slow next year, indicating that the sharpest gains are likely already behind the market.

Valuations Adjust Amid Inflation Concerns

US stocks have struggled since hitting record highs in August, largely due to persistent inflation concerns. S&P 500 valuations have declined even as analysts continue to raise earnings estimates. Consensus signals a healthy pace of profit growth, with expectations of 19% in 2027 and 17% in 2028. Goldman’s forecast of an 11% increase next year is slightly more cautious than these broader estimates.

Snider anticipates that the S&P 500 will rally 14% to about 8,700 points in the coming year. This projected gain is driven by earnings growth rather than expanding valuations. The strategist correctly predicted earlier that strong earnings and AI adoption would offset the negative impacts of higher oil prices and rate hikes, keeping the bull market intact despite macroeconomic headwinds.

Positioning Remains Overly Bullish

Bank of America Corp. strategists, including Jared Woodard and Michael Hartnett, offer a contrasting view. They warn that investor positioning remains too bullish given the outlook for slower profit growth. US stock funds attracted nearly $64 billion in weekly flows, the largest inflow in three months, according to data from EPFR Global cited in a BofA note. This heavy inflow suggests that market participants may be underestimating the risks associated with the deceleration in earnings momentum.