"The road ahead remains bumpy"! Goldman Sachs chief US equity strategist: The recent turbulence is not the end, but the beginning of greater volatility.

Goldman Sachs Chief US Equity Strategist Issues Warning: Recent market volatility is just the prologue. Despite solid earnings fundamentals, high-leverage trading structures and narrowing market breadth mean greater turbulence lies ahead.

Goldman Sachs Chief US Market Strategist Ben Snider maintains a year-end S&P 500 target of 8,000 points in his latest report, implying an annual gain of about 8%. He notes that investors are anchoring to near-term earnings prospects to navigate uncertainty, and overall earnings outlook remains robust.

However, he also warns that the market previously recorded a 99th percentile historical gain in two months, with the rally being overly concentrated and rapid, followed by a correction triggered by strong employment data, concerns about the economics of the AI ecosystem, and rumors of massive equity financing by cloud computing giants.

Ben Snider clearly states that high trading leverage—including retail margin financing and leveraged ETFs—along with extremely narrow market breadth, provide a structural backdrop for sustained high volatility. For investors, this means that risk management is more critical than ever under the narrative of an earnings-driven bull market.

Earnings are the core engine of the bull market, but growth will gradually narrow

Goldman Sachs projects S&P 500 earnings per share (EPS) growth of 24% in 2026 and 13% in 2027, characterizing this as the fundamental driver of the current bull market.

Q1 2026 earnings were strong and broad-based: S&P 500 consolidated EPS grew 18% year-on-year (excluding one-off items), with median single-stock earnings growth of 14%, marking one of the strongest quarters in the past decade. Ben Snider expects earnings growth to remain solid over the next few quarters, but as energy prices drag down consumer spending and corporate margins, growth will become more narrow and concentrated.

AI infrastructure stocks are expected to contribute about half of this year’s S&P 500 EPS growth, dominating upward EPS revisions since the start of the year. Year-to-date, the S&P 500 has returned 8%, while AI infrastructure stocks have returned 34%; other constituent stocks only 2%, closely matching their respective EPS estimate revisions.

Recent volatility is a warning signal, not the endpoint

Ben Snider makes it clear in the report: recent volatility is only a precursor to more turbulence ahead.

Before this round of correction, the S&P 500 had recorded a two-month return at the 99th percentile in history, with gains highly concentrated among a few stocks. Measured by realized volatility, it was the most extreme rebound since 1971. Subsequently, strong employment data, renewed concerns about the economics of the AI ecosystem, and reports of massive equity financing by cloud computing giants jointly triggered a correction.

Despite institutional investors opting to hedge rather than panic sell, and solid earnings fundamentals, Goldman believes that the coexistence of extremely narrow market breadth and high trading leverage—including sharply rising retail margin financing and leveraged ETF asset sizes this year—means volatility will remain elevated. Macro fundamentals deliver similar signals.

Sentiment is high but not extreme, AI trades dominate portfolio structure

Goldman’s US equity sentiment indicator currently reads +0.2, the lowest since early April. Among various investor exuberance indicators, the median is at the 86th percentile—high, but still below the extremes seen in 2000 and 2021.

Retail transactions and options pricing show elevated market expectations, while institutional investors express concern about the speed of the rebound and the AI-centric risk of the market becoming “One Big Trade.”

Latest portfolio disclosures show both hedge funds and mutual funds are increasingly tilted towards AI infrastructure stocks. Year-to-date, 33% of US active mutual funds have outperformed their benchmark, with the average return for long-short equity hedge funds at 9%.

Valuations are high, but growth is driven by earnings not P/E multiples

The S&P 500 now trades at 21 times expected earnings, in the 85th percentile since 1980, but roughly flat compared to a year ago—when the index level was 25% lower. The median S&P 500 stock’s P/E is 18, high by historical standards but consistent with recent years.

Ben Snider points out that unlike P/E multiples, free cash flow multiples have risen along with increased capital expenditure. He believes that uncertainty about sustained earnings strength will limit further P/E expansion, and that market gains will continue to rely on earnings growth rather than rising valuations.

Record equity financing, but not yet a threat to the bull market

Goldman believes that the record US equity financing expected in 2026 will not end this bull market, for three reasons.

First, IPO activity is rising but not extreme. About 100 deals are expected in 2026, close to the 25-year average and far below the 250+ in 2021 and nearly 400 in 1999. Second, supply relative to market size remains modest, about $700 billion in corporate equity issuance accounts for only 1% of the Russell 3000’s market cap, similar to the 2015–2019 average. Third, an estimated $1 trillion in stock buybacks should be sufficient to offset supply pressure, in addition to M&A, foreign investors, and household sector demand.

However, Goldman cautions that as lock-up periods expire, the equity supply-demand balance will face greater challenges in 2027.

AI investment boom continues, but payback window is uncertain

The AI investment boom shows no sign of slowing. Consensus forecasts indicate that the largest US hyperscale cloud companies will spend over $750 billion in capital expenditures this year, up 84% from 2025 and about $200 billion higher than expectations at the start of the year. Analysts expect another 20% growth next year, to $920 billion, with even more upside risk.

Q1 hyperscale cloud company earnings show some signs of investment returns, and management has clearly indicated the need for more computing power supply. However, rising token expenses again trigger investor concerns: can AI revenues support investments and market cap growth at this scale?

Ben Snider distills the core question: Can the earnings boost from AI investment persist before broader productivity returns materialize? This question is unlikely to be answered in the short term.

Structural risk building, Strait of Hormuz is most direct threat

Goldman points out that for a bull market driven by earnings, the main structural risk lies in deteriorating corporate earnings outlook. Historically, bull markets characterized by high valuations and concentration often end when excess speculation, Fed tightening, surging equity financing, and disappointing growth converge.

Ben Snider says these conditions are not all present yet, but each is closer to a tipping point than a few months ago. The market pricing of Fed policy has moved in a hawkish direction.

The most direct macro risk comes from the potential closure of the Strait of Hormuz, which would simultaneously threaten corporate earnings and the Fed’s room for easing. Prediction markets currently expect conditions in the strait to return to normal by year-end.

For AI trades, until broad productivity lift emerges, extreme narrowing of market breadth makes investors vulnerable to shocks in AI computing power demand or supply.

Risk Reminder and DisclaimerThe market has risks and investment needs caution. This article does not constitute personal investment advice, nor does it take into account the individual investment objectives, financial situation, or needs of any user. Users should consider whether any opinions, views, or conclusions in this article suit their particular circumstances. Investments made accordingly are at your own risk.