Goldman Sachs strategist: Be wary of "high valuations, high concentration, and high growth rates" in U.S. stocks, which have historically ended in sharp declines

# Source: Wall Street Insights

By Long Yue

Goldman Sachs' Snider forecasts the S&P 500 to surge to 7,600 points, but issues a stark warning: the current forward price-to-earnings (P/E) ratio of 22x is closing in on the 2000 bubble peak, with the top 10 stocks accounting for 41% of the index's total market cap. This combination of "elevated valuations plus extreme concentration" mirrors the market conditions preceding major crashes such as those in 1929 and 2000. The bigger risk lies in the soaring AI-related capital expenditure (Capex). Nevertheless, despite rampant talk of a bubble, the market has not yet exhibited signs of extreme irrational exuberance.

While Goldman Sachs maintained its bullish forecast that U.S. stocks will continue to climb to 7,600 points in 2026 in its latest outlook report, the firm's strategists also sounded a harsh warning, pointing out that the current valuation and concentration structure of U.S. equities bear similarities to the patterns seen before several major market crashes over the past century.

On Wednesday, January 7, Ben Snider, Goldman Sachs' newly appointed chief U.S. equity strategist, released his 2026 outlook report. In the report, he predicted that driven by U.S. economic growth and the Federal Reserve's continued accommodative policies, the S&P 500 will deliver a 12% total return in 2026, hitting a year-end target of 7,600 points.

Snider noted that of the S&P 500's 16% price return in 2025, earnings growth contributed 14 percentage points. He expects that fueled by productivity gains from AI adoption, the S&P 500's earnings per share (EPS) will grow by 12% in 2026 and 10% in 2027, which will provide a fundamental basis for the ongoing bull market. However, beneath this seemingly optimistic report, Goldman Sachs elaborated on the structural vulnerabilities facing the market.

## Valuations and Concentration Approach Historical Extremes, Pushing Up Market Vulnerability

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 approaching all-time highs".

**Stretched Valuations**: The S&P 500's forward P/E ratio based on the next 12 months' expected earnings currently stands at a lofty 22x. This level matches the 2021 peak and is just a stone's throw away from the all-time record of 24x set during the 2000 dot-com bubble. Snider acknowledged that such high multiples amplify the potential downside if earnings fail to meet expectations.

**Extreme Concentration**: The top 10 stocks in the S&P 500 now account for 41% of the index's market capitalization and 32% of its earnings. In 2025, these leading stocks contributed 53% of the index's total return. Goldman Sachs pointed out that as concentration rises, the idiosyncratic risks embedded in the S&P 500 and investors' reliance on the continued strength of the largest companies also increase.

Snider used a physics analogy to describe the current situation: "Valuations and concentration are measures of 'potential energy', which require a catalyst to be converted into stock market 'kinetic energy' (i.e., a decline)." He emphasized that the current combination of "elevated valuations, extreme concentration, and strong recent returns" in U.S. stocks is similar to several overheated market episodes over the past century.

These characteristics appeared to varying degrees during the 1920s market boom, the Nifty Fifty-dominated era of the early 1970s, the bull market leading up to the 1987 Black Monday crash, as well as the markets in 2000 and 2021.

A common thread among these historical periods is that they all ended with "significant stock market declines". Goldman Sachs explicitly warned that the current market faces the risk of a similar correction, which is the crux of the ongoing debate over whether a bubble exists.

## Capital Flows Remain Rational, with Bonds and Money Market Funds Favorited

Despite the worrying 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 reached levels of extreme euphoria.

**Speculative Activity**: While speculative trading activity surged sharply in 2025, it remains far below the peaks seen in 2000 or 2021.

**Capital Flows**: Last year, U.S. equity ETFs and mutual funds attracted approximately $100 billion in inflows, accounting for only 0.2% of the S&P 500's total market cap, which ranks at the 45th percentile over the past 20 years.

**Risk Aversion Sentiment**: In contrast, U.S. bond funds saw inflows of around $700 billion, and money market assets swelled by more than $900 billion.

Snider argued that these relatively restrained capital flows indicate that despite the market trading at all-time highs and frequent discussions about bubble risks, there has been no sign of extreme irrational exuberance.

## Soaring AI Capex Poses a Severe Test for Future Profit Returns

Beyond macroeconomic factors, Goldman Sachs believes that the key micro risk currently lies in the trajectory of AI-related capital expenditure and its return on investment.

**Skyrocketing Spending**: In 2025, the total capital expenditure of the largest listed hyperscalers reached approximately $400 billion, up nearly 70% from 2024 and 150% higher than the pre-ChatGPT level in 2022.

**Debt Dependency**: AI investment is expected to continue growing this year, with capital expenditure projected to hit 75% of cash flow—a ratio similar to tech spending in 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 historical capital expenditure. Given the market's consensus expectation of an average annual Capex of $500 billion from 2025 to 2027, these companies need to achieve an annual profit run rate of over $1 trillion to maintain the return on capital that investors have grown accustomed to. However, the current consensus profit forecast for 2026 stands at only $450 billion.

Nevertheless, Snider remained optimistic at the end of the report, writing:

> As investors enter 2026, they are poised to capture attractive beta and alpha returns. For index investors, low implied volatility and narrow credit spreads provide tools to maintain exposure to equity upside while controlling downside risks. Within the equity market, the dynamic macroeconomic environment, wide valuation dispersions, and low correlations create abundant opportunities for stock pickers.

## Risk Warning and Disclaimer

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