The Goldman team say what’s really the driver of its newfound optimism is its view on margin expansion
This week marks the kickoff of third-quarter earnings season—and another S&P 500 target upgrade from Goldman Sachs.
A team led by David Kostin made at least their third upgrade to S&P 500 forecasts this year. They now expect the S&P 500 SPX-0.96% to reach 6,000 in three months’ time, versus 5,600 previously, and 6,300 in 12 months’ time, versus 6,000 previously.
Their logic is that they are more optimistic on 2025 and 2026 earnings than most of Wall Street. They expect $268 of S&P 500 earnings per share next year and $288 in 2026—which is above the $265 in 2025 and $281 seen by other Wall Street firms, though less than when all of the company earnings estimates are mashed together, which is $275 for 2025 and $307 in 2026.
“From a top-down perspective, our economists’ forecast for U.S. GDP growth is above consensus. However, bottom-up analyst consensus EPS estimates are typically overly optimistic and are steadily cut during the forecast period,” they say.
The Goldman team say what’s really the driver of its newfound optimism is its view on margin expansion. The team expects profit margins to rise to 12.3% next year, from an estimated 11.5% in 2024, and to further increase to 12.6% in 2026. The Goldman team previously expected 24 basis points of margin expansion in 2025 vs. 78 basis points now.
“The macro backdrop remains conducive to modest margin expansion, with prices charged outpacing input cost growth,” they say.
Some of that margin shift also is due to expectations that elevated in-process research-and-development costs for healthcare companies, including Bristol-Myers Squibb BMY-0.96%, will normalize, and that charges that Warner Bros. Discovery WBD-0.77% and Uber Technologies UBER0.42% took this year won’t repeat. They also now expect a recovery in the semiconductor cycle as well as ongoing strength for mega-cap techs. “While the magnitude of beats may moderate, the recent GS Communacopia Conference indicated strong ongoing AI demand that should benefit these stocks,” they say.
