Goldman Sachs is still bullish on stocks. It just doesn’t want investors running after the same handful of names that carried the market this year.
The caution stands out from a bank that has been calling for the S&P 500 to reach 8,000 by year-end, a target built on strong profit growth and heavy AI spending.
The timing gave the warning an extra bite. On Oct. 16, the date on equity strategist Ben Snider’s report, the S&P 500’s technology sector fell more than 3%. And the Nasdaq lost about 2%, while energy stocks climbed as oil prices rose.
Leadership, in other words, was already wobbling before the report reached clients, according to Reuters.
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A narrow rally leaves momentum trades exposed
Goldman has been sounding this alarm for weeks. In a late September note, the bank said breadth had fallen to its weakest level since the dot-com bubble, even as strength in AI stocks kept the S&P 500 steady.
It added that the index’s forward price-to-earnings ratio had slipped from 22 to 19 times, partly because of rising interest rates, according to Investing.com.
The same lopsidedness shows up in profits. The top 10 contributors are projected to generate roughly 68% of third-quarter earnings growth. Micron and Nvidia alone account for more than a third of the total. Information technology and energy were projected to deliver nearly 80% of the increase between them.
That leaves a wide gap between the index and the typical stock. Goldman projected the S&P 500 could post 27% earnings growth for the quarter, CryptoBriefing noted, while the median company was expected to grow profits by roughly 9%.
For momentum strategies crowded into recent winners, that gap is where the reversals tend to start.
Investors have reshuffled fast. Goldman’s own equities trading revenue jumped 72% in the third quarter as clients adjusted their positions amid volatile markets. Those same forces are now testing the market’s most crowded positions.
Earnings still carry the market, but the pace is cooling
The early numbers support Goldman’s view of strong but slowing growth. With 9% of S&P 500 companies reporting by Oct. 16, the blended third-quarter growth rate stood at 29.0%, slightly below the prior week’s reading after a mixed start to the season, as reported by FactSet.
That would mark a third straight quarter of earnings growth above 25%.
Much of that growth rides on one spending cycle. Hyperscalers are expected to pour about $754 billion into capital spending this year. Goldman has said AI infrastructure accounts for roughly half of S&P 500 earnings growth.
A pullback by even a few of those big buyers would thin out the profit gains powering the index.
The payoff is harder to see outside the builders. About half of S&P 500 companies tied AI to efficiency on recent calls. Yet the measured earnings impact remained small.
Goldman also did not expect a repeat of the large mega-cap investment gains that flattered the second-quarter results, removing another source of support.
Higher borrowing costs are the other brake. Fed Chair Kevin Warsh has said heavy bond issuance by hyperscalers helps explain rising Treasury yields, and strategist Ed Yardeni cut his year-end S&P 500 target to 7,900 from 8,400 after the recent climb in yields, TheStreet reported.
Higher yields make bonds more competitive with stocks and weigh on growth expectations.
Why Goldman is warming to beaten-down consumer names
The consumer call hinges on energy. Goldman’s consumer researchers noted earlier this year that the lowest-income households spend roughly four times as much of their after-tax income on gasoline as the top earners do. That is why cheaper fuel matters so much to the bank’s case for stronger real income growth among those households next year.
That burden has grown heavier this fall. The energy index in the consumer price report jumped in September, led by gasoline. Bank of America noted that higher energy prices after the Iran conflict also pushed up airfares and rental car costs. Any easing in fuel prices would land first with lower-income families.
More Goldman Sachs:
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- Goldman Sachs sees big change coming for interest rates
The risk is that inflation proves stickier than Goldman assumes. Fed staff projected inflation would not return to the 2% goal until 2029. Governor Christopher Waller cited energy costs tied to the Iran war and AI-driven tech prices as forces stalling progress, according to TheStreet. Either one could delay the relief consumer stocks need.
Light positioning could help if the call proves early. Goldman’s broader positioning gauge, which tracks hedge funds, mutual funds, and other institutions, had fallen to its lowest reading since March by September, Snider said.
Less crowded exposure tends to leave less to unwind when markets turn lower.
What investors should watch from here
Goldman’s read on this market hasn’t changed much since June.
Back then, its strategists said the ride would stay rough but that earnings should pull stocks higher. They penciled in about $1 trillion in buybacks for 2026. Narrow leadership was already on their list of things that could shake things up.
The coming weeks will test that view. Capital.com analyst Daniela Hathorn said upcoming Big Tech earnings must show that heavy AI investment is turning into enough revenue and cash flow to justify the cost, as reported by TheStreet.
Those reports will help show whether market leadership broadens or simply rotates.
The Fed meets Oct. 27 and 28, and Bank of America hasn’t backed off its call for a rate hike after last month’s inflation numbers came in hot.
Goldman’s takeaway through all of it: K eep exposure, but shift attention away from the crowded trades toward companies with more staying power.
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