Goldman Sachs: US stock market gains are driven by earnings, not valuation bubbles, with fundamental support.

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Is the recent sustained rise of US stocks the result of a bubble or driven by fundamentals? Goldman Sachs has given a clear answer: it is earnings, not valuation expansion or speculative sentiment, that are supporting this bull market.

Goldman Sachs’ chief US equity strategist Ben Snider wrote in the Financial Times on Tuesday that the S&P 500 index has risen about 10% so far this year, while 12-month forward earnings expectations have increased by 15%. This means the market’s forward price-earnings ratio has actually edged down from 22 times at the beginning of the year to 21 times now. This data directly refutes concerns about a "valuation bubble" and provides a fundamental basis for the market’s continued upward movement.

The AI capital expenditure boom is the core engine of this round of earnings growth. Analysts estimate that data center infrastructure construction this year will contribute about half of the S&P 500’s earnings growth. Against this backdrop, key AI industry chain stocks such as semiconductors and power infrastructure have already risen 33% this year, with their forward earnings expectations also raised by 30%, as stock prices and earnings climb in tandem.

Ben Snider also cautioned that risks such as high valuations, increased market concentration, macroeconomic pressures, and a rise in IPO supply still exist, suggesting a bumpy road ahead.

Earnings growth outpaces stock price gains, actual valuation contraction

In the first quarter of this year, S&P 500 component stocks saw earnings per share grow by 18% year-on-year (excluding some one-off items). Even excluding large tech stocks, the median company in the S&P 500 achieved earnings growth of 14%, marking the strongest quarterly performance in more than a decade outside of the 2018 tax reform and the 2021 post-pandemic reopening.

Moreover, forward-looking earnings expectations continue to be revised upward. Since the start of the year, Wall Street analysts’ forecasts for S&P 500 earnings in 2026 and 2027 have both been raised, with the number of revisions upward exceeding downward revisions in every industry.

Because earnings expectations are being raised faster than stock prices, the S&P 500’s forward price-earnings ratio has fallen from 22 times at the start of the year to 21 times now. Ben Snider pointed out, this stands in sharp contrast to the late 1990s—when investors were betting on distant future earnings and constantly bidding up valuation multiples. Now, the synchrony between share prices and earnings shows that market pricing is more fundamentally supported.

AI capital expenditure boom supports half of earnings growth

AI investment spending is currently the main source of strong corporate earnings. Analysts estimate that the five major "hyperscale cloud computing providers"—Alphabet, Amazon, Meta Platforms, Microsoft, and Oracle—will collectively spend $755 billion on capital expenditures this year, up 83% year-on-year. The large-scale construction of data center infrastructure is expected to contribute about half of S&P 500 earnings growth this year and next.

This trend also directly explains the strong performance of semiconductor stocks and other beneficiaries of the AI supply chain. The portfolio consisting of semiconductor companies, power infrastructure firms, and other "picks and shovels" businesses has risen 33% this year, while their forward earnings expectations have also been raised by 30%. The rise in share prices is closely matched by earnings improvement.

Ben Snider points out, capital expenditure expectations have been continuously revised upward for three years, and are likely to keep rising in the coming months. The AI investment frenzy shows no sign of slowing yet.

Three major risks remain—a bumpy road ahead

Despite strong earnings momentum, Goldman Sachs clearly outlined three risks investors need to watch.

First, valuation multiples and market concentration are both at historical highs. The top ten S&P 500 constituent stocks now account for 41% of the total market cap—a decades-high, and market structural risks cannot be ignored.

Second, the macroeconomic environment is still under pressure. The oil price shock caused by the blockade of the Strait of Hormuz is squeezing corporate profit margins, eroding consumer purchasing power, and creating upward pressure on interest rates.

Third, stock supply is increasing. In the coming months, a wave of large IPOs is expected; as investors adjust portfolios to include new stocks, market volatility may intensify.

Ben Snider concludes that the above risks are real and the stock market will not have a smooth ride ahead. But for now, these risks have not materially hampered the earnings momentum supporting the market. In the face of uncertainty, investors remain focused on recent earnings performance, and their conclusion is: as long as strong earnings continue, the US stock market rally is likely to persist.

Risk Warning and DisclaimerThe market involves risk, and investment requires caution. This article does not constitute personal investment advice, nor does it take into account the individual investment goals, financial situation, or needs of any specific user. Users should consider whether any opinions, views, or conclusions in this article are suitable for their circumstances. Invest accordingly, at your own risk. ```