Goldman Sachs: US stocks are showing a pattern of “strong indices and weak confidence”, which may make up for the next phase of the market

The Zhitong Finance App learned that Goldman Sachs said that the US stock market is currently showing an unusual pattern — the index is showing strong performance, but investor confidence is weak, which means that the market still has potential for further growth, and individual stocks left behind by leading AI stocks in the early stages are expected to make up for the rise.

The S&P 500 index rose 14% this year, but Goldman Sachs's US stock sentiment index fell to -0.9, which is the same as the March low. The indicator combines nine measures of institutional, retail, and foreign investor positions. Goldman Sachs strategist Ben Snyder and his team said in a September 25 report that this reading means there is still room for investors to increase their exposure to stocks if the macroeconomic environment improves.

The weakness below the index's surface is even more prominent. The S&P 500's recent trading level is only 1% below its August record high, while the median constituent stock is 16% below its own 52-week high. Goldman Sachs's preferred market breadth index has fallen to its lowest level since the Internet bubble era.

For investors, this differentiation could be significant if uncertainty about interest rates and economic growth subsides. Goldman Sachs believes that there is room for an overall rise in the market and a rebound in backward stocks, but the abnormally narrow market breadth may also cause momentum trading to continue to fluctuate.

The general market rose, but valuations fell

Despite higher stock prices, the overall valuation of the market has been digested. The forward price-earnings ratio of the S&P 500 has shrunk to about 19 times, roughly the same as the 10-year average. The long-term profit growth rate that the market unanimously expected was far higher than the increase in the index itself, driving valuations down sharply from last year.

Rising interest rates are one reason. In the month covered by the report, the real yield on 10-year US Treasury bonds rose 53 basis points. Goldman Sachs said that this rate of increase has passed the threshold historically often associated with weakening stock returns.

Goldman Sachs estimates that the current 19-fold valuation multiplier for the S&P 500 is about 10% lower than the level implied by models based on interest rates, inflation, and corporate profitability. Strategists don't interpret this discount as evidence that profit prospects are too pessimistic. Instead, they think investors are questioning whether the current unusually high profit levels will continue.

AI spending boosts profits, but the boost may subside

This skepticism is particularly important as AI investment is booming.

Goldman Sachs estimates that the capital expenditure of hyperscale cloud service providers will reach 800 billion US dollars this year. These expenses are being converted into revenue and profits for semiconductor companies and other AI infrastructure vendors. The company estimates that capital expenditure of hyperscale cloud service providers contributed about half of S&P 500's profit growth this year.

But this benefit may not be sustainable at the current scale. As AI capital expenditure growth slows and depreciation costs rise, Goldman Sachs expects its contribution to S&P 500 earnings growth to weaken and eventually turn into a drag. The positive effects of the supply shortage that previously supported semiconductor companies' profit margins will gradually subside.

This helps explain a seemingly paradox in the current market. Based on recent profits, stock valuations seem reasonable; however, when looking at profits over a longer period of time, valuations seem expensive. The cyclically adjusted price-earnings ratio based on the 10-year profit calculation is close to the historical extreme, lower than the peak in 1999-2000, but higher than the level of 2021.

The picture depicted by free cash flow is less extreme. Goldman Sachs calculates that the free cash flow yield in the US stock market is 3.3%, which is lower than the historical median of 4.4%, but it is comparable to the level of several other periods in recent decades.

The level of profit determines valuation differentiation

Corporate profitability has become extremely important in determining which parts of the market receive premium valuations.

Goldman Sachs discovered that almost all differences in the current industry's net market ratio multiples can be explained by differences in return on net assets. The relationship between industry profitability and valuation is now one of the strongest in decades.

The current return on net assets for the S&P 500 is around 24%. Goldman Sachs calculates that the return on net assets corresponding to the current 19 times forward price-earnings ratio should be close to 22%, which indicates that the market has taken into account the decline in profitability from an abnormally high level.

The company's analysis also suggests that the recent strength of value stocks may be more difficult to sustain. The neutral long and short value factor in the Goldman Sachs industry has risen by more than 25% since mid-2025. However, valuation differences between individual stocks have narrowed, and Goldman Sachs economists expect economic growth to remain stable and close to trend levels. Historically, these two conditions have been less favorable to the value factor.

Investors' pricing perspective shifts to the long term

At the individual stock level, Goldman Sachs has observed significant changes in investors' pricing logic.

The market increasingly values long-term revenue growth. Investors gave higher than average valuation premiums for expected sales growth after three years, while weighting one-year sales growth was lower than usual.

This change reflects that the market no longer simply relies on short-term profits to determine long-term value. The AI investment cycle gradually boosts the profits of some companies, but AI technology itself may also erode the future earnings of other companies.

As a result, the market is increasingly focusing on a fundamental question: which companies can continue to grow after the current abnormal conditions are normalized?

Goldman Sachs maintains positive S&P 500 judgment

Despite these risks, Goldman Sachs still has a mixed view of the market as a whole.

The company predicts S&P 500 earnings per share of $375 in 2026 and $415 in 2027. Its target price for the S&P 500 index at the end of 2026 is 8,000 points, which is about 4% higher than the reporting benchmark. Its 12-month target price is 8,700 points, which means about 13% room for growth.

As a result, the investment context is more nuanced than the index's performance itself suggests. The S&P 500 has risen sharply, but its valuation multiples have declined. Investors have low positions, market breadth is at a historically narrow level, and profitability is still unusually high.

For investors, Goldman Sachs's analysis shows that the next phase of the market may be less dependent on further expansion of valuations, and more on whether profits can support valuations. If macroeconomic uncertainty declines, wait-and-see capital and sluggish positions may fuel a wider rise outside of stocks dominated by AI. However, continued high interest rates or a more drastic normalization of profits driven by AI may test whether the current 19-fold price-earnings ratio is actually as moderate as it seems on the surface.