Goldman Sachs: “profit bubble” concerns are exaggerated and the S&P 500 is expected to rise to 8,700 points next year

The Zhitong Finance App learned that Goldman Sachs Group strategists said that the impressive profit performance of US companies is being supported by steady economic prospects and the artificial intelligence (AI) boom, which means that concerns about the “profit bubble” have been exaggerated. Goldman Sachs predicts that corporate profits will increase by 11% next year, and is expected to push the S&P 500 index up 14% to about 8,700 points over the next year.

According to the data, profits of S&P 500 index constituents jumped about 30% in the first two quarters, respectively, making them among the strongest performers on record. Profit expectations for the full year also reached the highest level since the post-COVID-19 rebound in 2021.

Although this growth rate shows that companies are “overprofitable” as AI investment surges, the Goldman Sachs Strategy Team, led by Ben Snyder, said they expect profit growth to slow down rather than completely collapse in the next few years.

Snyder wrote in a report: “Market pricing reflects expectations of continued profit growth, but also has reasonable doubts about the sustainability of current profitability.”

Affected by concerns about inflation, the performance of the US stock market has been weak since reaching a record high in August. The S&P 500 index's valuation has declined, but analysts are still raising profit expectations. According to the data, the market generally expects profit growth rates to reach 19% and 17% in 2027 and 2028, respectively, maintaining a healthy level.

Goldman Sachs predicts that corporate profits will increase by 11% next year, which is slightly conservative. The strategy team said that although capital expenditure continues to rise, the boost from AI investment is expected to begin to subside in 2027. Snyder said that the profit margin expansion rate of semiconductor-related companies may slow down next year.

He predicts that the S&P 500 index will rise 14% to about 8,700 points in the next year. The main driving force is profit growth rather than valuation expansion. Snyder was one of the most market optimists at the beginning of the year. He correctly predicted that strong profits and the popularity of AI would offset the impact of high oil prices and interest rate hikes, and allow the bull market to continue.

Meanwhile, Bank of America strategists, including Jared Woodard and Michael Hartnett, warned that investors' current positions are still too optimistic given the prospects of slowing profit growth. Citing EPFR Global data, Bank of America indicated that investors poured into the US stock market at the fastest rate in three months in the last week and withdrew capital from corporate bonds.

The Bank of America report shows that in the week ending Wednesday, the stock market had a net inflow of 79.3 billion US dollars, of which 63.8 billion US dollars flowed into the US stock market, while investment grade bonds had outflows of 1 billion US dollars and high-yield bonds had an outflow of 2.5 billion US dollars.