S&P's profit growth rate fell to 11%, and defensive stocks became safe havens

According to Woofun AI, Goldman Sachs (GS.US) clearly warned in the US Weekly Launch Report released on October 16, 2026 that the S&P 500 index is facing a macroeconomic environment where profit growth is significantly slowing down, and defensive quality stocks and low volatility factors have become more stable allocation choices in the current market environment.

Core data reveals a cliff-style shift in earnings growth: S&P 500's 2026 earnings per share (EPS) are expected to grow 36%, while this growth rate will drop sharply to 11% in 2027. Specifically, Goldman Sachs (GS.US) predicts EPS of $375 in 2026, rising to $415 in 2027, and reaching a further $460 in 2028.

Although the absolute value is still rising, the pace of growth has changed markedly. The 2027 growth rate slowed significantly compared to 2026, and the 2028 growth rate remained flat. It is worth noting that the real profit growth rate in 2027 should be revised to 18% if the one-time accounting distortions that existed in 2026 are removed. Even so, the forecast fell short of the 16% agreed buyers' expectations and the 15% expectations of sell-side strategists. Looking further ahead, the $460 EPS forecast by Goldman Sachs (GS.US) in 2028 is about 7% lower than the buyer's unanimous expectation of $492.

The underlying reason for this slowdown in growth is the weakening of macroeconomic drivers: actual US GDP growth is expected to slow moderately in the next few quarters, mainly being dragged down by high oil prices and interest rates. Crucially, AI capital expenditure currently contributes about half of the S&P 500 EPS growth, but Goldman Sachs (GS.US) has determined that this drive will weaken significantly in 2027. Goldman Sachs (GS.US) expects real US GDP to grow by 2.2% in 2027, which is in line with market expectations, indicating that a slowdown in growth is not equivalent to a recession. The profit fundamentals of positive growth can still support the stock market, but return expectations need to be moderated accordingly.

According to data compiled by Woofun AI, early data from the third quarter earnings report showed that the extent to which profits exceeded expectations is narrowing. Of the S&P 500 companies that have published earnings, 53% of companies have an EPS that exceeds agreed expectations by more than one standard deviation. Although this ratio is above 50% of the 25-year average, it is significantly lower than the average of 64% over the past four quarters. Goldman Sachs (GS.US) pointed out that the decline in the ratio of profits exceeding expectations means that the breadth of profit revisions is shrinking, and the recent performance of cyclical stocks has failed.

At the same time, market breadth is close to an all-time low. The S&P 500 index is only 2% from its all-time high, yet the median constituent stocks still have a 15% gap from their respective highs. This divergence highlights structural risks in a narrow range. Historical data shows that in an environment of positive growth but deceleration, the median S&P 500 quarterly return was 3%, the price-earnings ratio changed to negative 1%, the median volatility was 13.3, and the median stock correlation was 0.29. Volatility and correlation will rise significantly only when growth turns negative. The current S&P 500 stock correlation and index volatility are close to historic lows. Goldman Sachs (GS.US) believes this has led to the momentum factor being congested and the risk is rising. In terms of valuation, the S&P 500's forward price-earnings ratio is 19 times, and the equal weight index is 16 times. The overall valuation is not at an extreme level, but investors need to be wary of the impact caused by the reversal of momentum factors.

In terms of industry allocation strategy, Goldman Sachs (GS.US) selected 23 healthcare and essential consumer stocks as core targets for defensive quality stocks. These stocks have low realized volatility, high free cash flow returns, and high free cash flow conversion rates, and EPS growth is expected to be no less than 5% in 2027. Historical experience shows that in an environment of positive growth but deceleration, information technology and healthcare usually outperform, while materials and non-essential consumption usually fail. Specifically, the median quarterly excess return for information technology was 1.1 percentage points, and healthcare was 1.0 percentage point; in contrast, materials were negative 1.5 percentage points, and non-essential consumption was negative 0.8 percentage points.

At the factor level, the median quarterly return for the momentum factor was 1.8 percentage points, the EPS correction factor was 1.3 percentage points, and the low volatility factor was 0.8 percentage points. Given the higher risk of momentum factors in a narrow range, low volatility and defensive quality stocks appear more stable. Another allocation clue comes from the acceleration of revenue at the lower end of consumption: the lowest income quintessential real income growth is expected to be 1.8% in 2027, far higher than 0.4% in 2026. Goldman Sachs (GS.US) believes that slowing inflation and the January cost-of-living adjustment to increase transfer payments are the main drivers. Supported by this, the basket of low-end consumer non-essential stocks has risen 7% since October.

Goldman Sachs (GS.US) pointed out that consumer experience stocks provide long-term growth and are not well valued. Hedge fund positions for non-essential consumer stocks are at a multi-year low, and market expectations are low. As energy prices and interest rates are expected to fall in 2027, real consumer income growth will be further boosted, and the acceleration of low-end consumption will support non-essential consumer stocks. The current Goldman Sachs (GS.US) US equity sentiment index is negative 0.4, indicating that positions are weak; 10-year treasury yields have declined by 20 basis points in the past two weeks, high-yield credit spreads have increased by 20 basis points, and AI-related issuers are under greater pressure. Against the backdrop of slowing growth, narrow breadth, and light positions, defensive quality stocks and low volatility factors are more stable choices.