Written by: Rita
S&P 500 earnings per share rose 51% year-over-year in the second quarter and 26% over the past four quarters, significantly exceeding the historical relationship between long-term trends and economic growth. In its U.S. Equity Outlook report published on September 17, 2026, Goldman Sachs stated that market concerns about a "profit bubble" are unfounded. The bank’s base case is a slowdown in earnings growth, not a collapse, with EPS growth of 11% in both 2027 and 2028, reaching $415 and $460, respectively.
Goldman Sachs analyst Ben Snider noted in his report that current above-normal earnings are being driven by three temporary factors. AI-related capital expenditures accounted for nearly half of this year’s earnings growth. Semiconductor profit margins are at multi-decade highs. Equity investment gains from large tech companies have boosted reported profits. All three factors are expected to weaken next year, causing earnings growth to return to normal levels.
Excessive profits but not a bubble
Valuation signals suggest the market is skeptical about the sustainability of current profitability. The S&P 500’s forward P/E ratio is 19x, in line with its 10-year average. However, the market’s P/E ratio based on trend earnings has only been exceeded during the peak of the dot-com bubble in the past several decades.
Goldman Sachs forecasts earnings per share of $415 in 2027 and $460 in 2028. This projection is close to the bottom-up market consensus of $419 and above the median top-down strategist forecast of $403. The bank’s 12-month S&P 500 return forecast is 14%, with a target of 8,700. Earnings growth, not valuation expansion, is the primary driver of the bull market.
AI capital expenditures account for nearly half.
AI capital expenditures are the largest driver of this year’s profit growth. Hyperscalers are expected to spend $800 billion this year, a 94% year-over-year increase. These expenditures are flowing to semiconductor, technology hardware, industrial, and utility companies, collectively accounting for approximately half of the S&P 500’s profit growth. Goldman Sachs forecasts capital expenditures to rise to $1.2 trillion in 2027 and $1.4 trillion in 2028.
As the pace of capital expenditure growth slows, depreciation expenses will rise. Goldman Sachs estimates that depreciation will drag on profit growth by approximately 5 percentage points in 2027, offsetting nearly half of the 11 percentage points contributed by capital spending. By 2028, the drag from depreciation will fully offset the profit boost from capital expenditure. The tailwind from AI investment on profits is turning neutral, or even negative.
Goldman Sachs noted that if capital expenditures in 2027 are $250 billion higher than the baseline, S&P 500 earnings growth would increase by approximately 6 percentage points. If capital expenditures decline by about 30% to $570 billion, profits related to AI infrastructure would decrease by approximately 40%, but would still be about 25% higher than 2025 levels.
Semiconductor profit margins find it hard to sustain expansion
Semiconductor gross margins are at their highest levels in decades. S&P 500 semiconductor companies have gross margins of approximately 70%, more than double historical levels. Goldman Sachs estimates that about one-quarter of semiconductor profit growth in 2026 will come from gross margin expansion. The bank’s analysts expect supply-demand tightness to persist through 2027, but anticipate the pace of margin expansion to slow significantly next year.
If semiconductor gross margins decline from 70% to the 15-year average of 55%, S&P 500 earnings would decrease by approximately 10%. Each one percentage point change in gross margin corresponds to roughly a one percentage point change in S&P 500 earnings per share growth. Goldman Sachs notes that current earnings are highly sensitive to semiconductor pricing, and a slowdown in AI infrastructure investment or increased supply could trigger margin compression.
Equity investment returns will decline next year.
Equity investment gains from big tech companies boosted reported earnings. In the second quarter of 2026, approximately $150 billion in equity investment gains raised S&P 500 earnings per share by 12%. Goldman Sachs expects additional gains in the second half of 2026, though smaller than those in the second quarter. These gains will decline significantly in 2027.
If this portion of earnings is fully excluded, the 2027 profit growth rate would rise from 11% to 18%. Goldman Sachs noted that this earnings component represents paper profits and does not reflect the underlying profitability of core operations. The market has already priced in this expectation, as semiconductor stocks have recently underperformed relative to earnings forecasts, indicating investor caution regarding earnings quality.
Valuation does not reflect the burst of the bubble
The current S&P 500 return on equity is 24%, the highest on record. Historically, this level would correspond to a forward P/E ratio exceeding 21x. The current P/E of 19x implies an implied return on equity of approximately 22%, 200 basis points lower than the current level and tied with 2021 for the highest on record.
Upside risks include higher-than-expected AI capital expenditures; if large-scale manufacturers increase their 2027 capex by $250 billion, it could boost earnings growth by approximately 6 percentage points. Downside risks include a slowdown in AI investment, declining semiconductor margins, and the disappearance of equity investment gains. Goldman Sachs believes the market has priced in expectations of slowing earnings growth but has not yet accounted for a bubble burst scenario.
Slowing profit growth is widely acknowledged; the key point of divergence is whether AI productivity can replace capital spending as the new driver of profits.
Disclaimer
This article is a compilation and interpretation by Chaoxiang Research of a third-party brokerage research report (Goldman Sachs, September 17, 2026), combined with publicly available market information. The ratings, price targets, earnings forecasts, and related judgments cited herein reflect the views of the brokerage’s analysts and represent only the position of their respective institution; they do not reflect the views of Chaoxiang Research nor constitute any investment advice.
The market carries risks; make decisions independently. This article should not be used as a basis for buying or selling any securities.