Goldman Sachs Global Stock Market Outlook: AI Capital Expenditure to Peak Next Year, Earnings Growth to "Slow Down Significantly", Cloud Giants Become "Defensive Assets"

As the AI capital expenditure boom approaches its peak, the global stock market's earnings growth engine is slowing down. In its latest Global Equity Strategy Outlook for 2027, Goldman Sachs notes that while earnings growth will slow significantly, currently oversold growth stocks—particularly the U.S. mega-cap cloud computing companies—actually present attractive opportunities for positioning.

Peter Oppenheimer, Goldman Sachs Chief Global Equity Strategist, stated in the latest “Finding Value in Growth” report that valuations of AI-related companies have already undergone a major correction, reflecting market concerns about AI capex peaking and returns slowing, which provides an attractive entry point for investors.

The cloud giants are now trading at 19.7 times expected earnings, not only below the lower bound of their historical range over the past 20 years, but also below the consumer staples sector at 21.0 times. Goldman Sachs characterizes them as "relatively defensive" assets.

This outlook was released against the backdrop of the Nasdaq 100 experiencing its worst single-day drop since the pandemic, with Nvidia also plunging this week due to news of its founder CEO stepping down.

Goldman Sachs forecasts a 12-month target of 8,700 points for the S&P 500, representing an increase of about 14% from current levels, with the TOPIX in Japan and Asian markets having the greatest potential upside, while Europe lags behind with an expected return of only about 6%.

The Oppenheimer team’s core view is that three key themes will define 2026: diversification is effective, earnings are the major driver of gains, and all markets are seeing valuation compression.

Over the past 12 months, the long-standing pattern of the U.S. equity market outperforming from 2009 to 2025 has reversed, with total returns across regions becoming more closely matched. However, the underlying drivers differ. In Asia (excluding Japan and emerging markets), 12-month forward EPS contributed about 70%, while valuation compression dragged down returns by over 50%.

The main sources of earnings growth are threefold: the technology sector continues its compound growth; rising oil prices boost commodity producers' profits; and spillover effects from the AI capex boom fuel the so-called HALO industries—“heavy-asset, low-churn” sectors like Industrials.

Meanwhile, valuations have ceased to expand further. The S&P 500 fell from the 100th percentile of its near 20-year range to 18.5 times earnings; the MSCI AC World currently has a forward P/E of 15.6 and a PEG of 1.1, near its 35-year average. This is the starting point for subsequent allocation decisions: the index is not cheap at a crisis level, but compared to previous high-valuation phases, the risk-reward profile has shifted.

For 12-month targets, the S&P 500 stands at 8,700 points, corresponding to a 14% rise. Regionally, Japan's TOPIX and Asia offer the greatest upside, while Europe is relatively behind at just 6%.

Goldman Sachs warns that in 2027, earnings growth in nearly all major markets will slow markedly.

Specifically, S&P 500 earnings growth is expected to drop from 36% to 11%; STOXX Europe 600 from 18% to 7%; TOPIX from 24% to 9%; and Asia from nearly 80% to under 30%. This is what’s been dubbed the “halving” of profit growth.

The core reason is the slowdown in capital expenditure growth among the mega cloud service providers, while depreciation from previous investments starts to show up.

Goldman Sachs estimates that cloud giants’ capex contributed 12 percentage points to S&P 500 EPS growth this year, up from 5 points in 2025 and 2 points in 2024; but by 2027, this contribution drops to 9 points, turning into a 5-point drag by 2028.

The same cooling is seen at the industry level.

• Information Technology earnings growth will drop from nearly 90% to 45%;
• Communication Services will turn from 34% growth to a 5% decline;
• Energy sector profits are up 99% this year amid conflict with Iran, but are expected to contract about 10% thereafter;
• Materials sector will slow from 45% to 12%.
• The only sector expected to accelerate is Healthcare, but this sector has already undergone a re-rating in valuations.

This means that the “tool suppliers” who benefited from the AI capex wave—chips, industrials, energy equipment—will now face slowing growth. Meanwhile, the “buyers” of AI capex, i.e. U.S. cloud giants, have been repositioned as relatively defensive due to valuation declines.

Goldman Sachs believes that AI-related companies have already been through a clear round of valuation correction, reflecting market anxiety over AI capex peaking and investment returns decelerating. Ironically, this downturn opens up a new window for allocation.

Recently, value stocks have outperformed growth stocks significantly across regions; the valuation gap between value and growth has narrowed from over 100% at the 2021 peak to about 45%-50%.

Meanwhile, the value factor is at the 90th percentile of the past 20 years, meaning it is now more expensive than growth in historical terms. The global technology sector, at around the 20th percentile for 20 years, is trading at P/E levels similar to the value factor.

The most crucial pricing signal appears among U.S. cloud giants: these companies currently trade at a forward P/E of 19.7, below their previous 20-year range and beneath the consumer staples sector’s 21.0 times. The premium of America’s top five stocks over the other 495 in the S&P 500 has also mostly compressed, very different from the extremes seen in 2000 or 2021.

This forms the basis for labeling "cloud giants as defensive growth assets": valuations have come down, balance sheets remain relatively healthy, and revenue streams are more diversified. The net debt/equity ratio in the developed-market technology sector is now in the single digits, compared to around 50% for the market overall.

The report notes that the most "high-risk, high-reward" opportunities are found in the highly cyclical growth sectors of semiconductors, memory, and hardware.

Goldman Sachs' Asia strategists calculate that the current stock prices of Korea’s memory sector reflect an embedded expectation for 2027 consensus earnings to be cut by 70%, which Goldman Sachs deems “overly pessimistic” as disclosures show that DRAM and HBM products are sold out through 2029.

The sector is currently trading at 0.7 times book value for 2028, a level that Goldman Sachs points out “has historically signaled robust future returns.”

Nonetheless, Goldman Sachs maintains a neutral rating on the Asian market. The reason is concentration risk: South Korea and Taiwan together comprise about 50% of the MSCI Emerging Markets Index, information technology accounts for more than 40%, and just three "AI core stocks"—TSMC, Samsung, and SK Hynix—make up roughly 30% alone.

This has widened the P/E discount of emerging versus developed markets to roughly 50%, the widest since at least 2010. Goldman Sachs forecasts the Asia (MXAPJ) USD return at 17%, but maintains a neutral stance adjusted for volatility (annualized volatility at 24.2%).