As the AI capital expenditure boom approaches its peak, the global equity earnings growth engine is decelerating. In its newly released 2027 global equity strategy outlook, Goldman Sachs points out that although earnings growth will slow substantially, growth stocks currently being sold off by the market — especially US hyperscale cloud computing companies — have instead become attractive positioning opportunities.
Goldman Sachs Chief Global Equity Strategist Peter Oppenheimer notes in the latest report titled "Finding Value in Growth" that AI-related company valuations have already corrected significantly, reflecting market concerns about AI capital expenditure peaking and returns slowing, which provides investors with an attractive entry point.
Cloud giants are currently trading at 19.7 times forward price-to-earnings, not only below the lower bound of their historical range over the past 20 years, but also below the 21.0 times of the consumer staples sector, leading Goldman Sachs to characterize them as "relatively defensive" assets.
The backdrop for this outlook is that the Nasdaq 100 index has just experienced its worst single-day decline since the COVID-19 pandemic, while Nvidia also plunged this week following the shock of news that its founder-CEO is departing.
Goldman Sachs forecasts a 12-month target of 8,700 points for the S&P 500 index, implying roughly 14% upside from current levels, with the Tokyo Stock Exchange index and Asian markets showing the greatest potential gains, while Europe is the most lackluster with expected returns of only about 6%.
2026: Earnings Carrying the Index, Valuations Cooling Down
The core judgment from Oppenheimer's team is that 2026 has three key themes: diversification proving effective, earnings bearing the primary driver of gains, and valuation de-rating occurring across all markets.
Over the past 12 months, the pattern of sustained US equity outperformance during the 2009 to 2025 period has partially reversed, with total returns across regions becoming relatively similar. But when broken down, the underlying drivers are not the same. In Asia excluding Japan and emerging markets, 12-month forward EPS contributed about 70%, while valuation compression dragged by more than 50%.
Earnings growth comes mainly from three sources: the technology sector continuing to compound; rising oil prices boosting commodity producer earnings; and the spillover effects of the technology capital expenditure boom driving the HALO sector — "heavy assets, low obsolescence" industries such as the industrial sector.
At the same time, valuations have not continued to expand. The S&P 500 has fallen from near the 100th percentile of its 20-year range to 18.5 times price-to-earnings; the MSCI AC World currently trades at 15.6 times forward price-to-earnings with a PEG of 1.1, close to its 35-year average level. This is also the starting point for subsequent allocation judgments: the index is not cheap enough to signal crisis levels, but compared with the previous high-valuation phase, the risk-reward ratio has changed.
Regarding 12-month targets, the S&P 500 target stands at 8,700 points, corresponding to 14% upside. Regionally, the Tokyo Stock Exchange index and Asia have the greatest upside potential, while Europe relatively lags behind at only 6%.
Earnings "Halving": AI Capex Beginning to Ebb, Depreciation Pressure Coming to the Fore
Goldman Sachs warns that in 2027, earnings growth will slow markedly across nearly all major markets.
Specifically, S&P 500 earnings growth is expected to drop from 36% to 11%; the pan-European Stoxx 600 from 18% to 7%; the Tokyo Stock Exchange index from 24% to 9%; and Asia from close to 80% to less than 30%. This is what is being called the "great halving" of earnings growth.
The core reason lies in the slowing pace of capital expenditure growth among hyperscale cloud service providers, while depreciation from previous investments is beginning to materialize.
Goldman Sachs estimates show that cloud giant capital expenditure contributed 12 percentage points to S&P 500 EPS growth this year, higher than 5 percentage points in 2025 and 2 percentage points in 2024; but by 2027, this contribution will fall to 9 percentage points; by 2028, it will turn into a 5-percentage-point drag.
At the sector level, the cooling is occurring in tandem.
Information technology earnings growth will drop from close to 90% to 45%;
Communication services will shift from 34% growth to a 5% decline;
The energy sector saw 99% earnings growth this year against the backdrop of the Iran war, and is expected to contract by about 10% thereafter;
The materials sector will slow from 45% to 12%.
The only sector expected to accelerate is healthcare, but that sector has already undergone a valuation re-rating.
This means that the "shovel sellers" who previously benefited from the AI capital expenditure wave — chips, industrials, energy equipment, and so on — will begin to face decelerating growth. Meanwhile, the "buyers" of capital expenditure, namely the US cloud giants, have instead been repositioned into a relatively defensive framework because their valuations have already fallen.
Value Hidden Within Growth: Cloud Giant Valuations Below Consumer Staples
Goldman Sachs believes that AI-related companies have already experienced a round of significant valuation de-rating, reflecting market concerns about AI capital expenditure peaking and investment returns slowing. But it is precisely this decline that has opened up a new allocation window.
Recently, value stocks have clearly outperformed growth stocks across all regions, with the valuation gap between value and growth compressing from over 100% at the 2021 peak to roughly 45% to 50%.
At the same time, the value factor is near the 90th percentile of its 20-year range, and from a historical relative perspective, has already become more expensive than growth. The global technology sector is at the 20th percentile of its 20-year range, with its price-to-earnings ratio approaching that of the value factor.
The most critical pricing signal appears in US cloud giants: these companies currently trade at 19.7 times forward price-to-earnings, below their past 20-year range and below the 21.0 times of the consumer staples sector. The valuation premium of the top five US stocks relative to the remaining 495 stocks has also nearly converged, already different from the extreme states seen at the 2000 or 2021 peaks.
This is the basis for "cloud giants becoming defensive growth assets": valuations have come down, balance sheets remain relatively healthy, and revenue sources are more diversified. The developed market technology sector's net debt-to-equity ratio is in the single digits, compared with about 50% for the overall market.
Chips, Memory, and Hardware: Greater Upside Elasticity, Greater Volatility
The report points out that the opportunities with the most "high-risk, high-reward" characteristics are concentrated in strongly cyclical growth sectors such as semiconductors, memory, and hardware.
Goldman Sachs Asia strategists estimate that the current share prices of the Korean memory sector imply a 70% downward revision to 2027 consensus earnings, which Goldman Sachs considers "seemingly overly pessimistic," because disclosures from relevant companies show that their DRAM and HBM products are already sold out through 2029.
The sector currently trades at 0.7 times 2028 book value, a level that Goldman Sachs notes "historically signals strong future returns."
However, Goldman Sachs simultaneously maintains a neutral rating on Asian markets. The reason lies in concentration risk: South Korea and Taiwan together account for about 50% of the MSCI Emerging Markets Index, with the information technology sector weighting exceeding 40%, and the three "AI core stocks" — TSMC, Samsung, and SK Hynix — alone accounting for about 30%.
This has widened the price-to-earnings discount of emerging markets relative to developed markets to about 50%, the widest since at least 2010. Goldman Sachs forecasts Asia (MXAPJ) dollar price returns of 17%, but maintains a neutral stance after adjusting for volatility (annualized volatility of 24.2%).
Yields and Oil Prices: Key Assumptions Face Challenges
The third pillar of Goldman Sachs' 2027 strategy is the expectation of low oil prices and declining bond yields.
The Goldman Sachs commodities team expects Brent crude to fall from about $100 per barrel at the end of 2026 to $78 per barrel by the end of 2027, and expects the Federal Reserve and the European Central Bank to pivot to rate cuts "around the end of 2027." Goldman Sachs' interest rate forecasts "remain more dovish than market pricing."
However, reality shows a clear gap from these expectations. The 10-year US Treasury yield currently stands at 5.12%, climbing further last Thursday after two consecutive upside CPI surprises; Goldman Sachs' own economists have also just adjusted their expectations to a later rate cut.
On oil prices, Brent crude rebounded 3.3% to about $96 last Thursday after Trump said the US does not need to reach a deal with Iran, and the "normalization" of the Middle East situation remains at the forecast level.
On regional allocation, Goldman Sachs ultimately recommends overweighting the US and Japan, neutral on Asia and emerging markets, and underweighting Europe. Goldman Sachs' caution on Europe stems from the negative impact of falling oil prices on energy sector earnings, government debt issues, and the uncertainty brought by a dense political calendar.
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