Goldman Sachs Warns of AI‑Driven Market Heat, But Bubble Indicators Still Below Historical Extremes

U.S. equities have surged in 2026, powered by artificial intelligence themes and momentum trading, raising fears of a bubble. Goldman Sachs acknowledges overheating signs but stresses that current indicators remain below the extremes of past speculative peaks.

Since late March, the S&P 500 has gained 13%, one of the strongest rallies in decades. Before last week’s pullback, the index had risen 15% in two months, ranking in the top 1% of returns since 1980. Much of the rally has been tied to AI‑linked stocks such as Micron Technology, fueling debate over sustainability.

Goldman analyzed nine indicators across prices, trading, investor sentiment, and corporate sentiment. The median reading is at the 86th percentile since 1995, compared with 100th percentile during the dot‑com bubble and 95th percentile in 2021. Market breadth has narrowed, with gains concentrated in fewer stocks, but concentration remains below late‑1990s levels.

Earnings expectations provide support. Consensus EPS forecasts for the S&P 500 have risen 16% this year, outpacing price gains. Goldman projects EPS of USD 340 in 2026, up 24% from 2025, suggesting fundamentals underpin the rally.

Trading signals are mixed. Speculative activity has risen but is below past peaks. High‑valuation stocks trade actively, with EV/sales ratios above 10x near record levels. Short interest is unusually high at 3.2% of market cap, the highest since 2008, showing caution beneath the surface.

Sentiment indicators diverge. AAII surveys show more bears than bulls, while Yale’s confidence index is near bubble highs. Goldman’s own sentiment gauge fell to 0.2, its lowest since April. Strategists’ year‑end S&P 500 targets range widely between 7,181 and 8,250.

Corporate activity is recovering. Equity issuance may hit record value in 2026, though relative to market cap it remains moderate. Buybacks are expected to exceed supply. IPOs are improving but remain far below 1999’s frenzy.

Goldman concludes that while enthusiasm is high and warning signs are emerging — including IPO revival, margin pressures, and Fed hike risks — conditions do not yet match past bubble extremes. The AI‑driven rally may be overheated, but fundamentals and cautious positioning distinguish it from historical manias.