This week, the third-quarter earnings season kicks off, accompanied by yet another upward revision to the S&P 500 forecast from Goldman Sachs.
Led by David Kostin, the Goldman Sachs team has made at least their third upgrade to the S&P 500 targets this year. The team now projects the S&P 500 to reach 6,000 within three months, up from a previous estimate of 5,600. They also foresee the index climbing to 6,300 in 12 months, compared to their earlier forecast of 6,000.
The basis for this optimism lies in their bullish outlook on earnings for 2025 and 2026, which exceeds the expectations of most Wall Street firms. Goldman expects S&P 500 earnings per share (EPS) to hit $268 in 2025 and $288 in 2026, higher than the consensus estimates of $265 and $281, respectively, though not as high as the combined estimates across all companies, which are $275 for 2025 and $307 for 2026.
“From a top-down perspective, our economists’ U.S. GDP growth forecast is above consensus. However, bottom-up consensus EPS estimates tend to be overly optimistic and are often revised downward during the forecast period,” the team noted.
Goldman Sachs attributes much of their newfound optimism to expected profit margin expansion. They predict margins will rise to 12.3% in 2025, up from an estimated 11.5% in 2024, and further expand to 12.6% by 2026. Earlier, they had anticipated a 24-basis-point increase in margins by 2025, but now expect a larger 78-basis-point expansion.
“The macroeconomic environment remains favorable for modest margin growth, with prices outpacing input costs,” they explained.
In addition to this, Goldman expects some industry-specific shifts to drive margin improvements. For instance, they predict that high research-and-development costs in healthcare, particularly for companies like Bristol-Myers Squibb, will normalize. They also foresee that charges faced by companies such as Warner Bros. Discovery and Uber Technologies this year won’t recur. Moreover, they anticipate a recovery in the semiconductor cycle and continued strength in mega-cap tech stocks.
Although they believe the magnitude of earnings beats may moderate, recent discussions at the GS Communacopia Conference indicated strong, ongoing demand for AI, which should further benefit large technology firms.
