With S&P 500 EPS seen at $415 in 2027, Goldman Sachs flags risk from narrow rally

Even as it favours staying in US equities, Goldman points to rotation rather than across-the-board gains. A drop in its momentum factor suggests this shift may already be happening, leaving crowded trades in AI and large-cap stocks most vulnerable. Oil prices remain a major variable: higher crude stemming from the Iran conflict restrains growth in Goldman's baseline scenario, meaning any further shock to energy supply would push back the consumer revival it expects in 2027. Lower-income and rate-sensitive consumer names stand to gain the most should inflation and interest rates fall. Upcoming third-quarter earnings reports will put profit forecasts to the test.

Goldman still sees the potential for US stocks to push higher, but the index's gains are concentrated in a small set of winners. The message is to seek out the next group of leaders rather than follow the previous ones.

Key points from the report:

• Strategists at Goldman Sachs, led by Ben Snider, expect US equities to continue rising on earnings; they see slower growth moderating the rally, not ending it.
• The S&P 500 sat about 2% below its high, while the median stock lagged its own peak by around 15%. Market breadth is at a level not seen since the dot-com era.
• Goldman's momentum factor slid 8% over one week, pointing to the danger for crowded trades.
• Goldman projects S&P 500 EPS at $375 in 2026 and $415 in 2027, with a 2028 estimate about 7% lower than the consensus.
• About half of the S&P 500's earnings growth comes from AI capital spending, a boost Goldman expects to diminish.
• Goldman is looking toward consumer stocks that have lagged, specifically those linked to lower-income households and experiences, betting on real income gains in 2027.

Goldman Sachs anticipates that the US stock rally will carry on, driven by higher corporate earnings. Yet the bank's strategists caution that the exceptionally tight market leadership puts investors at risk if they keep chasing recent winners.

A 16 October report from a team led by Ben Snider argues that decelerating economic and profit growth should temper market returns without halting the advance entirely. The team's preferred play is in consumer stocks that have trailed the broader market, set to benefit from stronger household spending power next year.

The real risk lies beneath the surface of the main index. At the time of writing, the S&P 500 was just shy of 2% from its peak, but the typical constituent stock was roughly 15% below its own record. Goldman's breadth metric was near its lowest in the post-dot-com period. This divergence threatens momentum strategies that bet on recent outperformers: either the stragglers catch up, or the leaders retreat to the mean. Either way, trades built on the previous leadership take a hit. The 8% one-week decline in the Goldman momentum factor illustrates how fast such positions can deteriorate.

Profit growth remains the bedrock. Goldman forecasts S&P 500 per-share earnings of $375 for 2026 and $415 for 2027. Excluding accounting anomalies, underlying growth is around 29% this year and 18% the next. Still, the bank does not foresee the same large upward revisions that have fuelled equities so far. Its 2028 forecast of $460 a share is some 7% below the consensus.

Artificial intelligence is at the core of the forecast. Goldman calculates that AI-related capital spending generates roughly half of the earnings growth in the S&P 500, a contribution likely to taper off as expenditure growth decelerates and depreciation climbs. This aligns with other signals in the AI sector: forecasts of memory costs consuming a larger chunk of hyperscaler budgets, and reports of data centre projects delayed by power grid limits.

Elevated interest rates and oil prices are expected to keep weighing on the economy. Goldman's consumer scenario relies on these pressures receding in 2027, with lower inflation, energy costs, and interest rates raising real incomes, especially for lower-income groups. The bank projects real income growth for the bottom 20% of earners to rise from 0.4% in 2026 to 1.8% in 2027. Hedge fund exposure to consumer discretionary names is at multiyear lows, which could intensify any bounce-back. That said, Goldman is picky, favouring lower-income consumer names and experience-based businesses over the entire sector.

In the past, phases of slowing yet positive expansion have still yielded returns, powered by earnings rather than valuation expansion, tending to benefit companies with consistent growth and reduced volatility. The hazard is a steeper downturn. Given that cyclical names are already falling behind defensives, the road ahead for the market's most recent leaders appears tougher.