Goldman Sachs Warns of Market Headwinds Despite 12% Earnings Growth

Goldman Sachs has issued a warning to investors, highlighting that despite the strong performance of first-quarter earnings reports and positive signals from trade negotiations, there are significant headwinds that could impact market performance. The S&P 500 index's constituent stocks reported a 12% year-over-year increase in earnings for the first quarter, with a profit margin of 12.1%. However, Goldman Sachs' Chief Strategist David Kostin has advised investors to remain vigilant.

Kostin pointed out that while the strong earnings performance suggests short-term upward potential, the economic challenges and uncertainties surrounding trade policies could exert pressure on the market. He emphasized that most companies have not fully accounted for the potential impact of tariff policies in their earnings guidance, and supply chain volatility risks should not be overlooked in the coming months.

Large-cap technology stocks, often referred to as the "seven giants," have once again been the driving force behind earnings growth. Excluding NVIDIA, which has not yet reported its earnings, the remaining six tech giants saw a 28% year-over-year increase in earnings, contributing 27% to the overall earnings growth of the S&P 500 index. In contrast, the remaining 493 constituent stocks saw earnings growth of only 9%. While Goldman Sachs expects this gap to narrow by 2026, the current market concentration poses a significant risk.

Kostin also noted that capital expenditure trends are diverging. While companies like Google have reaffirmed their spending plans and Meta Platforms has increased its capital expenditure guidance, overall capital expenditure revisions have weakened, reflecting growing market caution. Additionally, the risk of an economic recession remains a major downside threat. Goldman Sachs' models indicate a 45% probability of a U.S. economic recession in the next 12 months, but the low frequency of mentions of "layoffs" in earnings calls suggests that any economic slowdown is more likely to be a "mild recession."

Regarding market performance, Goldman Sachs has raised its target for the S&P 500 index over the next 12 months to 6200 points, implying a 9% increase from current levels. However, the firm expects the index's return to remain flat over the next three months, reflecting concerns about deteriorating growth data and high stock risk premiums. Kostin noted that the stock risk premium is unexpectedly low, with the S&P 500 index's current forward price-to-earnings ratio at 21 times, while earnings expectations are unrealistically high. Nevertheless, he remains optimistic about the medium-term outlook, predicting that the Federal Reserve will begin cutting interest rates in July, potentially avoiding a recession and accelerating earnings growth in 2026, which could pave the way for further stock gains.

Overall, the U.S. stock market is currently in a tug-of-war between strong current realities and weak expectations. Investors need to enjoy the short-term benefits of strong earnings while closely monitoring changes in tariff policies, corporate capital expenditure intentions, and shifts in Federal Reserve policy to navigate potential market volatility.