American corporations have posted two consecutive quarters of nearly 30% profit surges, sparking a heated debate over a potential "earnings bubble." While Goldman Sachs acknowledges that a slowdown is unavoidable, it asserts that predicting a crash is premature. With financing costs elevated, future market movements will hinge on the tangible delivery of earnings.

The robust profit growth over two straight quarters, combined with the continuous expansion of artificial intelligence investments, has led Wall Street to question whether S&P 500 companies are operating within an unsustainable "earnings bubble." However, Ben Snider, Chief US Equity Strategist at Goldman Sachs, believes these concerns are overblown. While there are indeed some extraordinary growth factors in current profits, the resilience of the US economy and AI capital expenditures continue to underpin corporate earnings. The more likely scenario is a gradual deceleration in growth, rather than a sudden profit collapse.

Bloomberg Intelligence data indicates that S&P 500 constituents saw year-over-year profit growth of approximately 30% in both the first and second quarters of this year, hovering near historical highs. Full-year earnings growth expectations are the strongest since the post-pandemic economic reopening in 2021. Sustaining such a high growth rate is challenging. Goldman Sachs does not assume companies can replicate this year's performance; instead, it believes market prices already reflect skepticism about the sustainability of current profit margins. Earnings growth will decline, but will it avoid a cliff-edge drop?

Market consensus currently projects S&P 500 earnings growth of around 19% and 17% for 2027 and 2028, respectively. Goldman Sachs' outlook is notably more conservative, forecasting a growth rate of roughly 11% next year. It also anticipates that the boost to profit growth from AI investments will start to wane beginning in 2027. The rapidly expanding profit margins of semiconductor-related companies over the past two years may also enter a deceleration phase.

Snider concedes that US companies currently exhibit a degree of "excess earnings." The demand for chips, data centers, cloud computing, and related capital equipment driven by AI infrastructure buildout has enabled some tech firms to see rapid simultaneous growth in revenue and profit margins. As long as the growth rate of capital expenditure slows—even if the absolute scale of investment continues expanding—the year-over-year earnings growth for these companies will naturally diminish. This scenario differs from a "bubble bursting."

Goldman Sachs' base case still rests on the US economy remaining in expansion, corporate revenue continuing to grow, and AI applications gradually spreading across more industries. Profit growth may taper from around 30% to low-double digits, but this does not equate to an earnings recession. Recent market performance also shows that investors are not infinitely extrapolating current ultra-high earnings growth rates.

Since hitting a record in August, the US stock market has weakened, with inflation and interest rates re-emerging as primary pressures. Even as analysts have consistently raised corporate earnings forecasts, the S&P 500's valuation multiple has actually declined. Snider suggests this indicates that current prices already incorporate a cautious assessment of whether high profit margins can persist.

High interest rates and oil prices are the biggest external pressures on earnings. The true sources of uncertainty for US earnings stem from financing costs and energy. This week, the Federal Reserve raised interest rates for the first time in over three years, and the 10-year Treasury yield briefly surpassed 5%. Meanwhile, oil prices remain elevated due to Middle East conflicts, causing companies to face rising costs for both capital and certain inputs. Reuters reported on Friday that after oil prices fell for a third consecutive day, US stock futures rebounded, with Nasdaq 100 futures gaining more than 0.5% at one point. This shows energy prices are still directly influencing investor judgments on inflation, interest rates, and corporate profits.

Snider stated that Goldman Sachs expects S&P 500 earnings to "decelerate, not collapse" over the coming years. Some other Wall Street institutions are more cautious about the risks than Goldman Sachs. Wells Fargo has previously indicated that the market has entered the late stages of a record earnings cycle and subsequently lowered its year-end S&P 500 target.

LSEG data shows that S&P 500 companies saw a year-over-year profit increase of roughly 35% in the second quarter, while the market projected full-year 2027 earnings growth would fall to about 15.3%. Wells Fargo and Bank of America have both recently warned that high bond yields, energy costs, and investor positioning could increase the risk of a stock market correction. Bank of America, citing EPFR Global data, noted that US equity funds attracted nearly $64 billion in the latest week, the largest weekly inflow in three months, indicating that investor allocations to US stocks remain high. Goldman Sachs' original analysis also mentioned that Bank of America strategists believe investor positioning is still overly optimistic given the impending slowdown in profit growth.

Goldman Sachs bets on earnings, not valuations, driving the next phase. The firm projects the S&P 500 will have roughly 14% upside over the next 12 months, targeting around 8,700 points. However, this forecast primarily relies on continued corporate earnings growth, not further P/E multiple expansion. In other words, with long-term Treasury yields near 5% and the Fed back in a rate-hiking cycle, the room for significant further valuation expansion is limited, meaning index gains will need to be backed by realized corporate profits.

This logic also makes the actual return on AI investments more critical. Capital expenditure itself can support revenue for chip, infrastructure, and equipment suppliers. But if corporate spending continues to increase while AI commercialization revenue fails to materialize concurrently, the market will eventually reassess the profit margins and investment returns of these companies. So far this year, earnings data has not shown this disconnect.

Earlier this year, Snider had predicted that strong corporate earnings and AI adoption could offset some of the pressure on the equity market from rising oil prices and higher interest rates. This remains the basis for Goldman Sachs' positive outlook on US stocks. Nevertheless, the firm also expects profit growth to decelerate noticeably starting next year, reflecting a view that current high profitability levels are not indefinitely sustainable. Rather, the trajectory is one of a gradual return from abnormally fast growth to a more normal double-digit pace.