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Corporate America’s extraordinary profit run does not amount to an earnings bubble, according to strategists at Goldman Sachs Group Inc. The firm says strong economic prospects and the artificial intelligence boom are providing genuine support for earnings.

Data compiled by Bloomberg Intelligence show profits at S&P 500 companies climbed about 30% in each of the first two quarters. Those results rank among the strongest performances on record.

Expectations for the full year are also the strongest since the post Covid rebound in 2021. The pace has fueled concern that companies may be earning more than can be sustained as spending on AI surges.

A Goldman team led by Ben Snider expects profit growth to moderate in the coming years rather than collapse. That distinction is central to the firm’s rejection of warnings that current earnings represent a bubble.

“Market pricing embeds an outlook for continued earnings growth but healthy skepticism regarding the sustainability of current profitability,” Snider wrote in a note.

US stocks have struggled since reaching a record in August, largely because of inflation concerns. At the same time, S&P 500 valuations have fallen even as analysts have raised their earnings estimates.

That combination supports Goldman’s view that investors are not simply assuming today’s unusually strong profitability will continue without interruption. Market pricing still anticipates earnings growth, but it also reflects doubts about whether current profit levels can last.

Consensus estimates cited in the Bloomberg Intelligence data call for profit growth of 19% in 2027 and 17% in 2028. Those projections still represent a healthy expansion, even though the expected pace slows.

Goldman is somewhat more cautious than the consensus outlook. Its forecast calls for an 11% increase next year, keeping the firm constructive on earnings while stopping short of the more aggressive estimates elsewhere on Wall Street.

The strategy team expects the lift from AI investment to begin fading in 2027, even as capital spending continues to increase. That suggests AI may remain a major corporate spending priority without delivering the same degree of earnings acceleration indefinitely.

Snider also expects the pace of profit margin expansion at semiconductor related companies to slow next year. The forecast points to moderation in one of the areas closely connected with the AI investment surge, rather than an outright reversal in profitability.

Despite that anticipated slowdown, Snider remains bullish on the broader market. He expects the S&P 500 to gain 14% and reach roughly 8,700 points over the coming year.

Importantly, Snider expects that advance to be powered by earnings growth instead of expanding valuations. The forecast therefore depends on companies continuing to generate higher profits, not investors paying increasingly elevated prices for each dollar of earnings.

Snider was among the more bullish market voices entering the year. He correctly predicted that strong corporate earnings and adoption of AI would outweigh the effects of higher oil prices and interest rate increases, allowing the bull market to remain intact.

Not every major Wall Street firm shares Goldman’s confidence about investor positioning. Bank of America Corp. strategists, including Jared Woodard and Michael Hartnett, warned that investors remain too bullish given the prospect of slower profit growth.

US stock funds attracted nearly $64 billion in weekly flows, the largest amount in three months, according to a Bank of America note that cited EPFR Global. The surge shows investors have continued directing substantial money toward stocks even as debate intensifies over how long exceptional corporate profit growth can continue.

Goldman’s outlook accepts that today’s earnings pace will cool, particularly as the boost from AI spending diminishes and semiconductor margin expansion slows. But the firm’s forecast still calls for earnings growth and a sizable S&P 500 advance, directly challenging predictions of a sudden profit collapse.

DISCLAIMER: GoldInvestors.news is not a registered investment, legal or tax advisor or broker/dealer. All investment/financial opinions expressed by GoldInvestors.news are from the personal research and experience of the owner of the site and are intended as educational material. Although best efforts are made to ensure that all information is accurate and up to date, occasionally unintended errors and misprints may occur.