Strategists at Goldman Sachs are pushing back against the notion that the U.S. equity market is trapped in a profit bubble, attributing the robust earnings of American corporations to a positive economic backdrop and a surging artificial intelligence boom.

Data compiled by Bloomberg Intelligence reveals that companies within the S&P 500 delivered profit growth of roughly 30% year-over-year in both the first and second quarters, placing this period among the strongest on record. Concurrently, market forecasts for full-year corporate earnings have climbed to their highest point since the rebound following the COVID-19 pandemic in 2021.

Propelled by the fervor for AI investment, such growth rates have led some observers to claim that businesses are enjoying excess profits. Yet, the team led by Ben Snyder at Goldman argues that while profit expansion is set to moderate in the coming years, a sudden collapse is not in the cards. "Market pricing reflects investors' anticipation of continued earnings growth alongside a sensible wariness over whether current lofty profit levels can be sustained," Snyder noted in a research report.

Inflation concerns have weighed on U.S. equities since they hit record highs in August, and despite analysts steadily raising their earnings projections, valuations for the S&P 500 have pulled back. According to Bloomberg Intelligence, consensus estimates indicate that corporate profits will still see healthy gains of 19% and 17% in 2027 and 2028, respectively. Goldman's forecast for next year's earnings growth sits at 11%, a figure slightly more conservative than the broader market consensus.

The strategy team cautions that even with continued elevated capital spending, the earnings boost derived from artificial intelligence could start to fade by 2027. Snyder also pointed to the likelihood that margin expansion for semiconductor-related firms will decelerate next year.

Looking ahead, Snyder projects that the S&P 500 will advance 14% over the next twelve months, reaching roughly 8,700 points, with gains fuelled by earnings growth rather than multiple expansion. Having begun the year as one of the more optimistic analysts, Snyder has previously been correct in predicting that strong profits and AI adoption would offset headwinds from rising oil prices and interest rate hikes, allowing the bull market to persist.

Meanwhile, strategists at Bank of America, including Jared Woodard and Michael Hartnett, have issued warnings that investor positioning remains overly optimistic in light of anticipated slower profit growth down the line. A report from the bank, citing EPFR Global data, indicated that U.S. equity funds saw weekly net inflows of nearly $64 billion, marking the highest level in three months.