Why stocks will sidestep 1920s and 1987 parallels, according to Goldman Sachs

By Steve Goldstein Goldman flags 'Phase 3-D' stocks on automation and robotics Money hasn't flowed to robotics and automation stocks, note Goldman Sachs strategists The year-end Goldman Sachs target of 7,600 for the S&P 500 has survived the first six days of the year. That, after Tuesday's close SPX, would represent a 9% increase from current levels. In a new note, strategists led by Ben Snider warn the market is about to navigate a difficult environment. "The U.S. equity market's current combination of elevated valuations, extreme concentration, and strong recent returns rhymes with a handful of overextended equity markets during the last century," says Snider and team. "These features to varying extents were also characteristics of the 1920s market boom, the 'Nifty Fifty' dominance in the early 1970s, and the 1987 bull run before Black Monday, in addition to the markets in 2000 and 2021. Not lost on investors is the fact that these episodes also ended with large equity market drawdowns, and the risk of experiencing a similar downturn in the near future underpins many of the current debates about whether the market is in a bubble," says Goldman. To be sure, the strategists are at pains to note some features of overextended markets are notably absent. Speculative trading is below the highs of 2000 or 2021, short interest is high, equity flows are subdued and IPO activity was modest last year. Corporate leverage also is low relative to history, albeit rising. Goldman defines speculative trading based on the share of volume in unprofitable stocks, penny stocks and those companies where the enterprise value to sales is higher than 10. Furthermore, the biggest risks on the macro side stem from either a deterioration in growth or a hawkish shift in the interest-rate outlook, but neither appears likely, they say. That said, they say the friendly macro backdrop may look less appealing toward the end of the year, as fiscal and monetary tailwinds fade while the disruption from AI increases. "From a corporate fundamental perspective, the S&P 500 EPS [earnings per share] growth rate will likely decelerate slightly in 2027 relative to 2026. From a political perspective, history shows that midterm elections often bring with them a rise in both policy uncertainty and equity market volatility, although that uncertainty also encompasses the possibility of new policy tailwinds," they say. On AI, with capex reaching 75% of cash flow, spending growth will increasingly be financed by debt. "As spending and debt grow, so do the necessary eventual profits to justify ongoing investments," they say. The mega-cap hyperscalers - Amazon (AMZN), Alphabet (GOOGL), Meta Platforms (META) and Microsoft (MSFT)- have risen with their earnings estimates. "In contrast with the surge in valuations during the late 1990s, the largest tech companies today have generally traded with near-term earnings estimates during the last few years," they say. One AI wrinkle they introduce is what is dubbed "Phase 3-D" - the interaction of AI with the physical world, through robotics and automation. A group of 26 stocks that are common constituents of U.S. robotics and automation ETFs - companies including Kratos Defense & Security Solutions (KTOS), Joby Aviation (JOBY), AeroVironment (AVAV) and Teradyne (TER)- outperformed sharply in early 2023, and once more in 2025, but still trade at just 26 times forward earnings. These stocks also aren't well owned, with the largest robotics ETFs receiving inflows in the second half of the year of just $750 million. "Increasing corporate AI adoption and decelerating AI investment growth should expand the focus of the AI trade from the direct beneficiaries of the AI infrastructure build-out, which have dominated investor focus during the past three years, to the 'Phase 4' companies boosting efficiency through use of AI and the 'Phase 3' companies with revenues benefiting from that adoption. We also expect increased focus on 'Phase 3-D,' the interaction of AI with the physical world via robotics and automation," they say. -Steve Goldstein This content was created by MarketWatch, which is operated by Dow Jones & Co. MarketWatch is published independently from Dow Jones Newswires and The Wall Street Journal. (END) Dow Jones Newswires 01-07-26 0538ET