I’ve seen a lot over my investing career. I began back in the early 1990s, so I’ve had a front-row seat to the Asian Financial Crisis, Long-Term Capital Management collapse, Internet boom (and bust), Great Recession, Covid, and 2022’s bear market.

Over the years, various bull and bear markets have taught me a lot about navigating the market. One of those lessons: Stocks follow earnings over time. Or more specifically, companies expected to see the best earnings growth tend to produce the best stock market returns.

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“Earnings growth accounted for 14 percentage points of the 16% S&P 500 price return in 2025 and has accounted for 8 percentage points of the 9% annualized gain for the index since 1990,” wrote Goldman Sachs analysts in a research note shared with me this week.

Since earnings are a function of revenue and profit margin, I devote considerable attention — like most investors — to forecasts for future revenue, profit margin, and earnings. Odds are stocks will perform best when all three are expected to climb.

We certainly have seen that play out in 2025, given that revenue, margins, and earnings growth underpinned the S&P 500’s 16.4% climb. And Goldman Sachs’ latest earnings outlook suggests we’ll see more of the same in 2026.

Goldman Sachs offers its 2026 market outlook.

Reuters

Goldman Sachs drops bullish earnings forecast

Goldman Sachs is among the most prominent investment banks in the world. It’s renowned for boasting some of the most influential economists and analysts on the planet, as evidenced by the fact that three of its alumni have served as Treasury Secretary over the years.

The 157-year old bank’s influence makes it a must-watch when it comes to outlooks and forecasts, so you may want to pay attention to what its analysts think will happen this year.

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In my review of its research note, Goldman Sachs laid out a bullish backdrop for the S&P 500 in 2026, mainly due to expectations that corporate profits will head even higher this year, despite headwinds, including rising job losses and ongoing tariffs.

“Healthy economic and revenue growth, continued profit strength among the largest US stocks, and an emerging productivity boost from AI adoption should lift S&P 500 EPS by 12% in 2026,” wrote Goldman Sachs.

The earnings forecast suggests a “more of the same” for corporate America. In 2025, FactSet data show that S&P 500 revenue grew 7% and earnings grew 12.3%, an impressive accomplishment, given that the Yale Budget Lab reports effective tariffs on imports have surged to 16.8% from 2.4% in January.

Goldman Sachs economists believe revenue and earnings will benefit from tailwinds from solid GDP growth in 2026, supported by AI spending, higher-than-usual tax refunds, and tax breaks under the One Big Beautiful Bill Act, or OBBBA, such as bonus depreciation on capital expenditures, including machinery for factories.

Goldman Sachs forecasts U.S. economic growth will accelerate in early 2026 due to:

  • The catch-up effect of the government reopening.
  • A reduced tariff drag.
  • The tax cuts and investment incentives in the 2025 OBBBA fiscal package.
  • Continued disinflation.
  • Fed easing.
    Source: Goldman Sachs “US Equity Outlook: Great Potential”

“Capex spending by the largest public hyperscalers totaled roughly $400 billion in 2025, nearly 70% growth relative to 2024 and 150% above spending prior to the release of Chat-GPT in 2022,” wrote Goldman Sachs. “AI investment should continue to grow this year.”

Goldman Sachs estimates hyperscaler capex will swell to $539 billion in 2026 and $629 billion in 2027.

Earnings growth will fuel above-average stock market returns

Goldman Sachs’ estimate that S&P 500 earnings will grow 12.3% this year leads it to conclude that 2026 will be yet another year of double-digit returns.

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“We expect another year of solid gains for US equities in 2026. We forecast an S&P 500 total return of 12% to a year-end level of 7600,” wrote the analysts, citing “healthy economic and revenue growth, continued profit strength among the largest US stocks, and an emerging productivity boost from AI adoption.”

If the S&P 500 rises 12%, this year will be the fourth consecutive year of double-digit returns that outpace the benchmark index’s historical average return. Since 1957, the S&P 500 has returned about 10% per year, according to Fidelity.

Risks exist, but valuation isn’t one of them

Investors consider the price-to-earnings ratio to be the gold standard valuation measure. The simple ratio divides price per share by earnings per share. Historically, the S&P 500 has generated higher forward one year returns when its P/E is below 20 and lower returns when it’s above 20.

Currently, the S&P 500’s forward P/E ratio, based on Wall Street analysts’ earnings estimates for the coming year, is 21.8, according to FactSet. Over the past decade, it has averaged 18.7.

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While above average, Goldman Sachs isn’t overly concerned. Its base case is for similar P/E ratios in 2026, as earnings growth does the heavy lifting when it comes to the market’s return.

“The potential energy in valuations requires a catalyst to become equity kinetic energy. Our base case forecast embeds a forward P/E multiple of 22x on consensus EPS at the end of 2026, similar to the multiple today and at the start of 2025,” wrote the analysts.

“Past equity cycles make clear that the biggest macro downside risks to the market are a growth disappointment or a shock from interest rates. Instead, our 2026 macro outlook for healthy economic growth and continued Fed easing is one that typically supports rising valuation multiples.”

My take after reading Goldman Sachs’ report is that while they acknowledge that elevated P/E ratios could be problematic if earnings results miss Wall Street estimates, market risks lurking will be tied to other catalysts, like an index overly reliant on the biggest companies, making it more subject to individual stock performance than in the past.

“The key macro risks today are a deterioration in the growth outlook or a hawkish shift in the interest rate environment, but neither appears likely in the near future. Two recurring macro elements of past equity market peaks have been Fed tightening and downturns in the growth backdrop. In contrast, the macro outlook for 2026 is characterized by above-consensus GDP growth, continued Fed cuts, and stable long-term interest rates,” conclude the analysts.

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