Goldman Sachs: U.S. stocks still have upside, but don't chase the leading stocks; market breadth is near its narrowest since the dot-com bubble.

Goldman Sachs strategists Ben Snider and his team believe U.S. stocks can continue to rise as corporate earnings grow, but given that market leadership remains unusually concentrated, investors should be cautious about chasing recent winners. In their October 16 report, the strategists argued that slowing economic and earnings growth should weigh on equity returns rather than end the rally. Among the opportunities they prefer are previously lagging consumer-facing stocks, supported by expectations that household purchasing power will improve in 2027. The warning lies beneath the market's overall performance. At the time of the report, the S&P 500 was just 2% from its all-time high, while the median constituent stock was 15% below its own high. Goldman's measure of market breadth was near its narrowest level since the dot-com bubble. This gap poses a problem for momentum strategieswhich favor recent outperformers. Market participation could broaden as laggards recover, or leading stocks could fall back toward the rest of the market. Either scenario could reverse trades that benefited from the old leadership pattern. Goldman's momentum factor fell 8% in the week covered by the report, illustrating how quickly such positions can unwind. Earnings still provide support Goldman forecasts S&P 500 earnings per share of $375 in 2026 and $415 in 2027, corresponding to growth of 36% and 11% on the report's basis. After excluding one-time accounting distortions, the firm sees growth of 29% this year and 18% next year. This distinction matters: even as growth slows, the underlying earnings outlook remains solid. Higher interest rates and oil prices are expected to dampen economic activity. Meanwhile, the earnings boost from artificial intelligence investment should diminish as spending growth slows and depreciation expenses rise. Goldman estimates that AI capital spending currently accounts for about half of S&P 500 earnings growth. The strategists also believe that the room for large upward revisions to earnings forecasts that previously supported the stock market is shrinking. Their 2027 forecast is close to the analyst consensus, while their 2028 forecast of $460 per share is about 7% below consensus. Early third-quarter results provided initial support for this more cautious view. With only 10% of S&P 500 companies having reported, 53% beat consensus earnings by more than one standard deviation of analyst expectations. That is above the 25-year average of 50% but below the 64% average of the previous four quarters. Lagging consumer stocks offer potential opportunities Goldman's consumer thesis rests on falling inflation, lower energy prices and lower interest rates in 2027. Together, these changes should boost inflation-adjusted income growth, especially for low-income households. The firm forecasts that real income growth for the lowest-income quintile of households will accelerate from 0.4% in 2026 to 1.8% in 2027 (measured fourth quarter to fourth quarter). Cost-of-living adjustments to January transfer payments should provide additional support. Positioning may help with the recovery. Goldman prime brokerage data show that hedge fund exposure to consumer discretionary stocks is at multi-year lows, indicating that investors have largely retreated from the sector. A Goldman basket of consumer discretionary stocks exposed to low-income consumers has risen 7% since early October. The strategists also favor companies tied to consumer experiences, citing durable growth prospects and undemanding valuations. But this preference is selective. Historically, when economic growth is positive but slowing, the consumer discretionary sector as a whole has tended to underperform. A harder stock-picking environment Goldman's analysis shows that in past periods of positive but decelerating growth, the S&P 500 generally still rose further. Those returns came more from earnings growth than from investors being willing to pay higher valuations. Such an environment typically favors companies with durable growth DRIVE, improving earnings expectations and lower stock price volatility. Snider's team expects companies with the "accelerating profit growth" characteristic to command a premium as that trait becomes scarce. The risk is a deeper slowdown. Rising financing costs have already weighed on economically sensitive stocks and some AI trades, and hedge funds have also reduced exposure. Goldman's cyclical-versus-defensive pair trade fell 6% in the two weeks before the report was published. For investors, the firm's view supports maintaining equity exposure but with greater focus on earnings resilience, valuation and positioning. Further gains remain possible, but the stocks that previously led the market may face a harder path.