Goldman Sachs: Earnings Growth Outpaces Stock Price Gains, U.S. Stock Rally Backed by Fundamentals
0xBroomberg
Goldman Sachs chief US equity strategist Ben Snider argues that the S&P 500 is up roughly 10% this year, yet forward earnings expectations have risen 15% — prices are actually lagging profits, meaning this rally is driven by real earnings growth, not a valuation bubble.
Is there actually a valuation bubble?
The S&P 500's forward P/E — the price divided by expected earnings over the next 12 months — stood at 22× at the start of the year. It has since edged down to 21×.
This means → stock prices rose, but earnings expectations rose faster, so the valuation multiple actually shrank rather than expanded.
In plain terms = the market is not "paying more for hope." Profits have genuinely caught up — the opposite of the late-1990s dynamic, when investors kept bidding up multiples on distant earnings fantasies.
How strong was the first quarter?
S&P 500 companies posted 18% year-on-year EPS growth in Q1; strip out mega-cap tech and the median company still grew earnings by 14%.
That 14% is the strongest quarterly result in over a decade, outside the 2018 tax-cut windfall and the 2021 post-Covid reopening surge.
This reflects a broadening of the earnings recovery beyond a handful of giants — the rally's foundation is wider than the headline index suggests.
Why can AI capex underpin half the market's earnings growth?
Alphabet, Amazon, Meta, Microsoft, and Oracle — the five hyperscale cloud operators — are expected to spend a combined $755 billion in capex this year, up 83% year-on-year.
The massive buildout of data-center infrastructure is forecast to account for roughly half of S&P 500 earnings growth this year and next.
This means → AI is no longer just a stock-price narrative. It is converting into real corporate profit through a tangible chain: capex → equipment procurement → supplier revenue.
Why are the "picks and shovels" stocks outperforming?
A basket of AI supply-chain "picks and shovels" names — semiconductors, power-infrastructure firms — is up 33% year-to-date, while forward earnings estimates for the same basket rose 30%.
In plain terms = a 33% price gain backed by a 30% earnings upgrade means the rally is tracking real profit improvement almost one-for-one, not speculation.
Capex expectations have been revised upward for three consecutive years, with no sign of slowing so far.
What three risks does Goldman flag?
Concentration risk: the top ten S&P 500 stocks now account for 41% of total market cap — the highest in decades — with valuations and concentration both at historic extremes.
Oil-price shock: the threat of a Strait of Hormuz blockade is squeezing corporate margins, eroding consumer purchasing power, and putting upward pressure on interest rates.
IPO wave: a surge of new listings is expected in coming months; investors rebalancing to accommodate new stocks could amplify short-term volatility.
Where is the critical verification point?
Ben Snider concludes: these risks are real, but none has yet dealt a material blow to the earnings momentum underpinning the market.
This means → the current market thesis holds only as long as AI capex keeps converting into deliverable corporate earnings.
In plain terms = as long as the chain "spend on data centers → companies book profits" stays intact, the rally has fundamental support. The moment that chain cracks, elevated valuations + concentration risk will amplify each other.
Content is for reference only, not financial advice.