Speculative fervor is high but not at elevated levels pointing to a big market pullback
The American flag flies behind a Wall Street sign near the New York Stock Exchange (NYSE) in New York City on April 22, 2026.
The S&P 500 has just registered its 19th record close of 2026. But Goldman Sachs thinks there's many more to come.
The Wall Street bank late Tuesday raised its S&P 500 end-of-year target to 8,000 from 7,600 as it expects valuations to be supported by continued growth in corporate profits. Goldman joins Deutsche Bank and Morgan Stanley with an 8,000 target, with Yardeni Research at 8,300.
"The increased return forecast reflects increased estimates for S&P 500 earnings following an exceptionally strong Q1 reporting season," said a team of strategists led by Ben Snider.
The Goldman team have raised their S&P 500 SPX earnings per share forecasts to $340 for 2026, that's an increase of 24% year-on-year, and $385 in 2027, a 13% jump.
"The beneficiaries of AI infrastructure investment will account for roughly half of S&P 500 EPS growth this year," they said.
Goldman don't expect the multiples applied to earnings to change much, however, as they note the multiple this year has actually declined 4%.
Their S&P 500 target incorporates a P/E multiple that remains close to the current 21 times, they said.
"Going forward, our base case is for a market multiple that remains flat as the valuation tailwind from modestly lower Treasury yields is offset by the valuation headwind from decelerating economic and earnings growth, investor skepticism about the persistence of earnings tied to the AI infrastructure build-out, and continued uncertainty around both AI disruption and the geopolitical outlook," said Goldman.
In answer to those fretting about the imminent bursting of a market bubble, the Goldman team argue that the "conditions that have marked the ends of past bull markets remain mostly absent today."
In particular, speculative sentiment may be elevated but it is currently less extreme than at the ends of past ebullient markets, with retail trading activity and Goldman's Speculative Trading Indicator still below historical and recent highs. Similarly, the IPO calendar is picking up but capital-markets activity has recently been light relative to past cycles, according to Goldman.
"Although we expect a record year of issuance in 2026, we view that supply as a risk rather than a reason for pessimism, and expect corporate equity demand will outweigh supply this year," they said.
Still, Goldman accepts that recent surges in investor risk appetite and the momentum factor are two hints of speculative excess.
"In addition, while S&P 500 earnings estimates have risen more quickly than index price appreciation, the semiconductor stocks at the heart of the AI infrastructure complex have recently outpaced their forward earnings," Goldman said.
The bank also warns that the market may face macroeconomic headwinds as higher energy prices because of the Iran war weaken consumer spending, put more more pressure on profit margins, and cause higher inflation which reduces the chances of the Federal Reserve easing policy.
Furthermore, Goldman notes that the large recent increases in AI capex estimates and associated earnings forecasts have created a high bar to sustain the pace of upward revisions going forward. In addition, historical equity market seasonality, especially ahead of midterm elections, argues for weaker returns in the months ahead, they note.
But, all told, Goldman said its "base case is for U.S. equities to generate positive returns on net through year-end."
"Our U.S. Equity Sentiment Indicator currently registers just 0.3, pointing to modest investor positioning. An improvement in the geopolitical outlook or dovish shift in rate market pricing would spur further equity market upside." Goldman said.
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