The S&P 500 Is Expected to Rally 12% This Year

Earnings drove the majority of S&P 500 returns in 2025

“Healthy economic and revenue growth, continued profit strength among the largest US stocks, and an emerging productivity boost from artificial intelligence (AI) adoption should lift” US stock earnings in the coming years, Ben Snider, chief US equity strategist, writes in the team’s report. Double-digit earnings growth is “providing the fundamental base for a continued bull market,” he adds.

That said, stock markets valuations are high. The S&P 500 trades at a forward price-to-earnings (P/E) ratio of 22x (on consensus forward 12-month EPS). That matches the peak multiple in 2021 and approaches the record 24x multiple in 2000.

“In our base case outlook, steady long-term interest rates and earnings growth rates suggest there will be little change in equity valuations during 2026,” Snider writes. “But elevated multiples are hard to ignore, and they increase the magnitude of potential equity market downside if earnings disappoint expectations.”

The concentration of market capitalization among a handful of technology companies is also the highest on record. “This concentration has been a clear positive for the market during the last few years,” Snider writes. Fueled in part by spending on AI, the top tech stocks accounted for 53% of the S&P 500’s return in 2025.

“Nonetheless, as concentration has risen, so has the idiosyncratic risk embedded in the S&P 500 and investor dependence on the continued strength of the largest US companies,” Snider adds.

Are US stocks in a bubble?

“The US equity market’s current combination of elevated valuations, extreme concentration, and strong recent returns rhymes with a handful of overextended equity markets during the last century,” according to Goldman Sachs Research. But even though some of the most notable financial market booms over the past 100 years were followed by steep declines in equities, some features of those episodes are missing today.

For example, speculative trading activity rose sharply in 2025 but remains well below the highs of 2000 or 2021. Broad-based equity flows have recently been subdued.

In contrast with the booms of 2000 and 2021, IPO activity in 2025 was modest, although Goldman Sachs Research expects volumes to increase in 2026. Leverage on corporate balance sheets is rising but remains low relative to history.

What are the biggest risks to the US stock market in 2026?

The biggest risks to an equity market rally are weaker than expected economic growth or a hawkish shift by the Fed. “Neither appears likely in the near future,” Snider notes.

Goldman Sachs Research forecasts US GDP to grow 2.7% this year and expects the Fed to make two rate cuts this year (as of January 6).

According to Goldman Sachs Research, historically, the S&P 500 P/E multiple has:

• Risen by an average of 5%-10% during 12-month periods of stable or accelerating US economic growth
• Risen by a similar 5%-10% magnitude during periods of non-recessionary rate cuts
• Increased by roughly 10%-15% when both conditions occurred simultaneously

What does AI spending mean for US stocks?

Also among the key risks to stock market returns are the trajectory of AI capex, returns on that investment spending, and the impact of AI adoption. The largest public hyperscale tech companies had roughly $400 billion of capital expenditures in 2025, nearly 70% more than 2024.

Goldman Sachs Research expects AI investment to continue to increase this year. But as capex is on track to reach 75% of cash flows—similar to tech company expenditures in the late 1990s—spending growth going forward will increasingly rely on debt funding.

“History shows a mixed track record regarding the eventual success of first movers in periods of major technological innovation,” Snider writes. “While odds are good that some of today's largest companies achieve that success, the magnitudes of current spending and market caps alongside increasing competition within the group suggest a diminishing probability that all of today’s market leaders generate enough long-term profits to sufficiently reward today’s investors.”

“In our view, the AI trade in 2026 is likely to be defined by a deceleration in investment spending growth, a rise in AI adoption, and consequent rotations within the AI trade rather than widespread AI exuberance or gloom,” he notes.