Goldman Sachs strategists: Beware of the U.S. stock market's "high valuation, high concentration, high increase," which historically often ends in a significant decline

Despite Goldman Sachs maintaining its optimistic forecast that the U.S. stock market will continue to rise to 7,600 points by 2026 in its latest outlook, its strategists have also issued a stern warning, pointing out that the current valuation and concentration structure of the U.S. stock market resembles characteristics seen before several major crashes in the past century.

On Wednesday, January 7, Goldman Sachs' newly appointed Chief U.S. Equity Strategist Ben Snider released his 2026 outlook report. In the report, he predicts that driven by U.S. economic growth and the Federal Reserve's continued accommodative policies, the S&P 500 index will achieve a total return of 12% by 2026, with a year-end target price of 7,600 points.

Snider noted that of the 16% price return of the S&P 500 index in 2025, earnings growth contributed 14%. He expects that with productivity improvements brought about by AI adoption, the S&P 500's earnings per share (EPS) will grow by 12% in 2026 and 10% in 2027, providing a fundamental basis for a sustained bull market. However, behind this seemingly optimistic report, Goldman Sachs elaborated on the structural vulnerabilities facing the market.

Valuation and Concentration Approaching Historical Extremes, Market Vulnerability Rising

Goldman Sachs strategists warned that the core tension in the U.S. stock market lies in the contradiction between a "solid fundamental backdrop" and "valuation multiples near historical highs."

• High Valuation: Currently, the forward price-to-earnings (P/E) ratio of the S&P 500 index based on expected earnings per share for the next 12 months is as high as 22 times. This level is on par with the peak in 2021 and is just a step away from the historical record of 24 times during the 2000 internet bubble. Snider acknowledged that such a high multiple increases the magnitude of market declines if earnings fall short of expectations.

• Extreme Concentration: The top ten stocks in the S&P 500 index currently account for 41% of the market capitalization and 32% of the earnings. In 2025, these leading stocks contributed 53% of the index's returns. Goldman Sachs pointed out that as concentration rises, the embedded idiosyncratic risks in the S&P 500 index and investors' reliance on the continued strength of a few largest companies also increase.

Snider used physics terminology to describe the current situation: "Valuation and concentration are measures of 'potential energy' that require a catalyst to convert into 'kinetic energy' (i.e., a decline) in the stock market." He emphasized that the current combination of "high valuations, extreme concentration, and recent strong returns" in the U.S. stock market is similar to several overheated market conditions seen in the last century.

These characteristics appeared to varying degrees in the market boom of the 1920s, the 'Nifty Fifty' dominance in the early 1970s, the bull market before Black Monday in 1987, and the markets of 2000 and 2021.

A common point among these historical periods is that they all ultimately ended with "significant declines in the stock market." Goldman Sachs explicitly warned that the current market faces the risk of experiencing similar pullbacks, which is the focal point of the current debate about whether there is a "bubble."

Capital Flows Have Not Gone Crazy, Bonds and Money Market Funds More Favored

Despite concerns about market structure, Goldman Sachs also pointed out a key difference between the current market and past bubble periods: investor sentiment and capital flows have not yet reached extreme levels of euphoria.

• Speculative Activity: Although speculative trading activity is sharply rising in 2025, it remains well below the peaks of 2000 or 2021.

• Capital Flows: Last year, U.S. stock ETFs and mutual funds saw an inflow of about $100 billion, accounting for only 0.2% of the S&P 500 market capitalization, placing it in the 45th percentile over the past 20 years.

• Risk Aversion: In contrast, U.S. bond funds attracted about $700 billion in inflows, while money market assets grew by over $900 billion.

Goldman Sachs' Snider believes that this relatively restrained capital flow indicates that, despite the market being at historical highs and frequent discussions of bubble risks, there has not been an extreme irrational exuberance.

Surge in AI Capital Expenditure Faces Huge Profit Return Challenges Ahead

Setting aside macro factors, Goldman Sachs believes the current key micro risk lies in the trajectory of AI capital expenditure (Capex) and its return rates.

• Spending Surge: In 2025, the total capital expenditure of the largest publicly traded hyperscale tech companies is expected to be around $400 billion, an increase of nearly 70% from 2024 and 150% higher than spending levels before the release of ChatGPT in 2022.

• Debt Dependency: AI investments are expected to continue growing this year, with capital expenditure likely reaching 75% of cash flow—similar to the tech spending levels of the late 1990s. Future spending growth will increasingly rely on debt financing.

• Profit Gap: Over the past decade, the profits of these large tech companies have typically been 2-3 times their past capital expenditures. Given the market's general expectation of an average annual capital expenditure of $500 billion from 2025 to 2027, these companies would need to achieve an annual profit run rate of over $1 trillion to maintain the capital return rates that investors are accustomed to. However, the current profit expectations for 2026 are generally only $450 billion.

Nonetheless, Snider remains optimistic at the end of the report, writing:

Investors entering 2026 can expect substantial beta and alpha returns. For index investors, lower implied volatility and smaller credit spreads provide tools to maintain exposure to stock upside while controlling downside risk. Within the stock market, the dynamic macro environment, significant valuation disparities, and lower correlations create abundant opportunities for stock pickers