Goldman Sachs: Concern over "profit bubble" is exaggerated, S&P 500 could rise to 8,700 points next year

According to Jinse Finance, strategists at Goldman Sachs stated that the impressive earnings performance of U.S. companies is being supported by a robust economic outlook and the artificial intelligence (AI) boom, which means concerns about an "earnings bubble" are exaggerated. Goldman Sachs predicts corporate earnings will grow by 11% next year, potentially driving the S&P 500 Index up 14% over the next year to around 8,700 points.

Data shows that profits of S&P 500 component companies jumped by about 30% over the previous two quarters, ranking among the strongest performances on record. The full-year earnings expectations have also reached the highest level since the rebound following the COVID-19 pandemic in 2021.

Despite the pace indicating "excess profits" as AI investment surges, the Goldman Sachs strategy team led by Ben Snider said they expect profit growth to slow in the coming years, rather than completely collapse.

Snider wrote in a report: "Market pricing reflects expectations for continued earnings growth, but at the same time, a reasonable degree of skepticism about the sustainability of current profitability."

Affected by inflation concerns, the U.S. stock market has been weak since reaching record highs in August. S&P 500 Index valuations have declined somewhat, yet analysts continue to upgrade earnings expectations. Data indicates that market consensus expects profit growth rates of 19% in 2027 and 17% in 2028, maintaining healthy levels.

Goldman Sachs forecasts corporate earnings to grow by 11% next year, which is somewhat conservative. The strategy team said that although capital expenditures continue to rise, the boost from AI investment is expected to start fading in 2027. Snider mentioned that the pace of margin expansion for semiconductor-related companies may also slow next year.

He expects the S&P 500 Index to rise 14% over the next year to about 8,700 points, with profit growth being the main driver rather than valuation expansion. Snider has been one of the most optimistic market strategists since the start of the year. He accurately predicted that strong earnings and AI adoption would offset the effects of high oil prices and rate hikes, allowing the bull market to continue.

Meanwhile, Bank of America strategists, including Jared Woodard and Michael Hartnett, warned that given the outlook for slowing profit growth, investors’ current positions remain too optimistic. Bank of America cited EPFR Global data showing that investors poured into U.S. stocks at the fastest pace in three months over the past week and withdrew funds from corporate bonds.

Bank of America’s report shows that in the week ending Wednesday, net inflows into the stock market totaled $79.3 billion, of which $63.8 billion went into U.S. stocks. Investment-grade bond funds saw an outflow of $1 billion, and high-yield bond funds saw an outflow of $2.5 billion.