Goldman Sachs: "Earnings bubble" concerns are exaggerated; S&P 500 expected to rise to 8,700 points next year.

Goldman Sachs Group strategists said that the strong earnings performance of US companies is being supported by a solid economic outlook and the artificial intelligence (AI) boom, which means concerns about an "earnings bubble" are exaggerated. Goldman Sachs forecasts that corporate earnings will grow 11% next year and could drive the S&P 500 up 14% over the next year to about 8,700 points. Data shows that profits for S&P 500 constituent companies jumped about 30% in each of the first two quarters, ranking among the strongest performances on record. Full-year earnings expectations have also reached their highest level since the post-COVID rebound in 2021. Although this pace of growth suggests that companies are "over-earning" as AI investment surges, the Goldman Sachs strategy team led by Ben Snider said it expects profit growth to slow in the coming years rather than collapse outright. Snider wrote in a report: "Market pricing reflects expectations for continued earnings growth, but also carries reasonable skepticism about the sustainability of current profitability." Affected by inflation concerns, US stocks have weakened since hitting a record high in August. S&P 500 valuations have declined, but analysts are still raising earnings expectations. Data shows that consensus expectations for profit growth in 2027 and 2028 are 19% and 17%, respectively, remaining at healthy levels. Goldman Sachs forecasts that corporate earnings will grow 11% next year, slightly conservative. The strategy team said that although capital expenditure continues to rise, the boost from AI investment is expected to begin fading in 2027. Snider said margin expansion at semiconductor-related companies may also slow next year. He expects the S&P 500 to rise 14% over the next year to about 8,700 points, driven mainly by earnings growth rather than valuation expansion. Snider was one of the most bullish market voices at the start of the year. He correctly predicted that strong earnings and AI adoption would offset the impact 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 prospect of slowing profit growth, investors' current positioning remains too optimistic. Bank of America cited EPFR Global data in noting that investors poured into US stocks in the latest week at the fastest pace in three months and withdrew funds from corporate bonds. The Bank of America report showed that in the week ended Wednesday, equity markets saw net inflows of $79.3 billion, of which $63.8 billion flowed into US stocks, while investment-grade bonds saw outflows of $1 billion and high-yield bonds saw outflows of $2.5 billion.