In the shadow of a resilient bull market now marking its fourth year, Goldman Sachs offers a roadmap for what lies ahead, emphasizing the pivotal role of broadening participation beyond the tech titans that have dominated recent gains.
Drawing from historical precedents and current economic signals, the firm’s late-January 2026 client note—authored by a team led by U.S. Portfolio Strategy Head Ben Snider—envisions three distinct trajectories for stock performance, each hinging on how the rally expands to encompass laggards like small caps, cyclicals, and international equities.
This analysis arrives amid tentative signs of rotation: the equal-weighted S&P 500 has advanced 4% year-to-date through late January, surpassing the cap-weighted index’s 1% rise, as investors pivot toward undervalued segments in anticipation of sustained growth.
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Goldman’s broader 2026 outlook underpins this framework, projecting a sturdy U.S. economy with 2.8% global growth—outpacing consensus estimates of 2.5%—and the S&P 500 climbing to 7,600 by year-end, implying a 12% total return.
CEO David Solomon, in recent commentary, pegs recession odds below 20%, attributing resilience to moderating inflation and potential productivity boosts from AI, though he flags geopolitical tensions and regulatory hurdles as potential “speed bumps.”
The firm identifies five overarching investment themes shaping the year: mid-cycle economic acceleration, the great corporate re-leveraging (as firms boost debt for growth), evolving geopolitics, AI’s next wave, and a pivot to quality assets amid volatility.
Yet, the path to broadening will define whether the bull sustains or stumbles, with earnings momentum emerging as the critical driver.
Path One: The “Catch-Down” Precipice – Mega-Cap Valuations Crater
Echoing the dot-com era’s implosion, this scenario sees a sharp contraction in valuations for the market’s heaviest hitters, particularly the AI-fueled tech behemoths. Historical parallels point to the 2001 tech wreck, where overinflated multiples burst, dragging broader indexes lower before a rebound.
Goldman downplays this risk for 2026, noting that mega-cap tech’s forward price-to-earnings (P/E) ratio hovers around 27—a premium over the S&P 500 that ranks in the modest 24th percentile relative to the past decade’s tech spreads.
Dispersion among these giants remains elevated, but the firm anticipates persistence rather than a collective plunge. Still, investor wariness over AI hype could amplify volatility if earnings disappoint, potentially curtailing the rally’s upside.
Path Two: The “Catch-Up” Surge – Valuations Lift Across the Board
Conversely, this route envisions a valuation expansion rippling through the market’s underperformers, buoyed by accelerating growth during the Fed’s easing phase. Drawing from cycles since 1980, such conditions have historically propelled the equal-weighted S&P 500’s P/E multiple 10% to 15% higher over 12 months.
The strategists temper expectations here, highlighting that the equal-weighted index already trades at a forward P/E of 17—placing it in the lofty 95th percentile versus levels since 1990.
This stretched positioning, combined with macro fair-value assessments, suggests limited room for a dramatic uplift. Small- and mid-caps, however, could see targeted gains if growth momentum holds, aligning with Goldman’s view of early-2026 broadening, favoring these segments before a potential slowdown.
Path Three: Earnings-Led Equilibrium – The Bull’s Sustainable Fuel
Goldman’s base case envisions broadening propelled by robust corporate profits spreading beyond big tech, mirroring the 2021 surge where mid-tier earnings outpaced leaders. Here, the “average stock” delivers superior growth, sustaining the rally without extreme valuation swings.
Consensus forecasts bolster this: S&P 500 EPS is expected to rise 15% annually in 2026, with the equal-weighted index at 10%—among the strongest projections in recent history.
The firm ties this to early-year economic acceleration, forecasting the trend to continue near-term but with a “limited runway” as growth moderates later in 2026.
“We believe the ultimate degree of equity market broadening will depend on the degree of earnings broadening,” the note emphasized, aligning with views from peers like JPMorgan, which also anticipate profit diversification supporting small- and mid-caps.
This earnings-centric path dovetails with Goldman’s global equities forecast of 11% returns over the next 12 months, driven by AI’s productivity tailwinds and a pivot to quality amid uncertainties.
Yet, Solomon’s “speed bumps”—from trade tensions to regulatory scrutiny—could disrupt momentum, particularly if geopolitics escalates.
Investors understand the message to be that diversification matters, with opportunities in cyclicals, quality growth, and international markets as the bull evolves. However, with economic tailwinds in play but valuations stretched, the earnings path offers the most balanced route forward—provided profits deliver on the hype.