Goldman Sachs Asset Management urges investors to maintain their positions in the US equity market, specifically the S&P 500, despite anticipating a deceleration in profit growth. The financial institution projects a slowdown in earnings per share (EPS) expansion from a robust 36% in 2026 to a more moderate 11% in both 2027 and 2028, largely due to the diminishing boost from AI-related capital expenditures. However, Goldman Sachs highlights historical market trends where a significant portion of bull market gains materialized after earnings growth peaked, advising against attempts to prematurely exit the market unless confronted with severe external disruptions.
This perspective provides reassurance to investors who might be contemplating reducing their equity exposure following recent tech sector downturns. Goldman's analysis suggests that a mere slowdown in earnings growth has seldom been the sole catalyst for ending a bull market. The primary risk, as acknowledged by Goldman itself, lies in cycles abruptly cut short by unforeseen external events, such as the aggressive interest rate hikes observed in 2022. With the Federal Reserve currently pursuing a tightening monetary policy, this particular scenario warrants close monitoring by traders. A more aggressive stance on interest rates would pose a greater challenge to the "stay invested" philosophy than would a reduction in profit expansion.
Historically, past bull markets demonstrate that between 40% and 60% of total returns were generated subsequent to the peak in earnings growth. For instance, during the 1994-2000 cycle, the S&P 500 witnessed an impressive 166% return after its earnings peak. Similarly, the 2009-2015 bull market added 105% post-peak, and the 2002-2007 period saw an additional 46% gain. Exceptions to this pattern occurred when external factors prematurely curtailed market cycles. Examples include the 2016-2018 bull run, which yielded only 8% after its earnings peak due to escalating trade tensions, and the 2020-2022 cycle, which saw only a 10% post-peak return in the wake of aggressive interest rate increases. Consequently, Goldman Sachs advocates for diversification as a risk management tool rather than attempting to predict market tops, emphasizing the potential for investors to miss substantial gains by doing so.
The financial giant also underscored the sustained demand across digital platforms, citing Meta's strong performance, which is buoyed by unprecedented user engagement and the swift adoption of its AI assistant, Muse. Goldman Sachs notes the growing prominence of commerce as a vital application, opening up new revenue avenues through transactions, subscriptions, and business agents. Although high inference costs have temporarily hindered global deployment, Meta anticipates enhanced efficiency through optimizing its models and infrastructure. Goldman has identified three crucial elements driving sustainable expansion: the reallocation of advertising budgets towards AI-powered, measurable platforms, benefiting leading technology firms at the expense of traditional agencies; the leverage of scale and pricing power by market leaders to absorb increased costs without impacting demand; and rigorous cost management by media and consumer enterprises to finance AI investments while maintaining profit margins.
The current investment thesis hinges on whether the present economic climate mirrors the extended cycles of the 1990s and 2010s or the shorter periods abruptly terminated by policy interventions. Therefore, while a moderation in earnings growth for the S&P 500 is anticipated, Goldman Sachs advises against divestment, advocating for a diversified approach to risk management and emphasizing the historical propensity for significant market gains to occur even after initial growth surges have subsided, provided no major external shocks disrupt the broader economic trajectory.