Goldman Sachs Downplays S&P 500 'Earnings Bubble' Fears, Forecasts Slower Growth

Goldman Sachs is pushing back against concerns of an "earnings bubble" in the S&P 500, arguing that while some corporate profits are unsustainably high, a broad collapse is unlikely. The investment bank's analysts forecast a deceleration in earnings growth, not a contraction, in the coming years.

Profits Above Trend, But No Collapse Expected

The analysis, led by analyst Ben Snider, comes after S&P 500 earnings per share (EPS) surged 51% in the second quarter and 26% over the past four quarters, pushing profits significantly above their long-term trend. Goldman noted that while the index's forward price-to-earnings multiple of 19 is consistent with its 10-year average, its valuation based on trend earnings has only been higher during the dot-com bubble peak.

Despite these elevated levels, the firm's base case is for a slowdown, not a collapse. Goldman forecasts S&P 500 EPS growth of 11% in both 2027 and 2028, reaching $415 and $460, respectively.

AI Boom and Tech Gains Under Scrutiny

Goldman Sachs identified several key factors influencing the earnings outlook, particularly related to the technology sector:

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• Artificial Intelligence: The AI investment boom has been a major tailwind, responsible for nearly half of this year's earnings growth. Analysts expect this contribution to fade by 2028 as capital spending slows and depreciation costs mount.
• Semiconductor Risk: A potential downturn in semiconductor prices represents a significant risk. An adverse scenario could cut S&P 500 earnings by approximately 10%, according to the note.
• Mega-Cap Investments: Gains from equity investments held by mega-cap technology firms boosted second-quarter earnings by 12%, a contribution that Goldman expects will diminish in 2027.

Market Outlook

Looking ahead, Goldman Sachs maintains a constructive view on the market, predicated on continued profit growth rather than expanding valuation multiples. The bank projects a 12-month S&P 500 return of +14% to a target of 8,700.

"Our 12-month S&P 500 return forecast... reflects the view that earnings growth, rather than expanding valuations, will remain the primary driver of the bull market,” the analyst concluded.