Why Goldman Sachs expects S&P 500 profits to cool but U.S. stocks to stay on track

Goldman Sachs (NYSE: GS) expects earnings growth across the S&P 500 Index to cool in the third quarter of 2025 after several quarters of double-digit gains, yet the investment bank believes most U.S. corporates will still exceed Wall Street’s expectations. The firm projects that aggregate S&P 500 earnings will grow about six percent year-on-year—roughly half the pace of earlier quarters—but stresses that resilient consumer demand, cautious guidance, and margin discipline could drive another round of modest earnings surprises.

The forecast highlights a critical turning point for investors trying to assess whether the U.S. equity rally remains sustainable or is merely pausing after the artificial-intelligence-powered surge that defined the first half of 2025. Goldman’s economists said the slowdown should be seen as a “normalization phase” rather than the start of a profits recession. The bank continues to hold an overweight stance on U.S. equities and has lifted its year-end S&P 500 target from 6,600 to 6,800 points, reflecting faith in the underlying economic momentum.

Why is Goldman Sachs forecasting slower S&P 500 earnings growth in Q3 2025?

Goldman Sachs’ analysts argue that much of the deceleration stems from tougher year-on-year comparisons and fading one-off benefits that previously amplified margins. During the first half of 2025, earnings growth was supercharged by extraordinary results from the “Magnificent Seven” technology giants and record levels of AI infrastructure spending. As those base effects roll off, growth naturally moderates.

The investment bank’s modeling indicates that tariff-related headwinds, rising input costs, and a stronger U.S. dollar could trim two to three percent from S&P 500 aggregate profits. Companies in trade-sensitive sectors such as industrials and consumer goods are expected to feel the most pressure. However, Goldman remains relatively upbeat because unit volumes and pricing power in consumer-facing industries still appear solid, while energy and utilities could benefit from firmer commodity prices during the quarter.

The bank also notes that revenue expansion continues to outpace cost growth across most non-cyclical sectors. That dynamic, it argues, could cushion the impact of narrowing margins. In other words, the growth slowdown reflects arithmetic, not deterioration in corporate health.

How does Q3 2025 differ from the high-growth Q2 period?

In the second quarter, U.S. corporations enjoyed a powerful mix of margin expansion and top-line momentum, boosted by strong AI-related investment and consumer resilience. Roughly 80 percent of reporting companies beat consensus earnings estimates, propelling the S&P 500 to record highs.

The third quarter, by contrast, brings a more complex environment. Base effects are tougher, and the benefit of cost deflation in logistics and raw materials has largely been exhausted. Wage pressures, while easing, remain sticky in services and healthcare. Goldman Sachs expects operating margins to compress by around 50 basis points sequentially, though still remain historically high.

The firm also observes that the AI spending boom—while still robust—is entering a more selective phase. Hyperscalers and semiconductor majors may slow incremental investment as capacity utilization peaks. This tapering is expected to ripple through suppliers and cloud infrastructure firms, producing a short-term moderation before the next investment cycle begins in 2026.

What major risks could derail—or improve—the outlook?

Goldman Sachs outlines a symmetrical risk profile. On the downside, renewed trade tensions and higher tariffs could sap export volumes and lift input costs. Elevated geopolitical risk—from Middle East energy disruptions to European demand softness—could further weigh on sentiment. Higher long-term yields, if sustained, could also pressure equity valuations by raising discount rates and refinancing costs.

However, several upside catalysts remain. A dovish turn by the Federal Reserve later in 2025 could ease borrowing costs and boost valuation multiples. Continued consumer spending resilience—underpinned by low unemployment and healthy household balance sheets—may surprise to the upside. Companies that successfully pass costs through to end customers could defend profitability more effectively than markets currently assume.

Goldman’s economists add that headline inflation remains on a disinflationary path, which supports real income growth and stabilizes corporate pricing power. The firm views this macro backdrop as conducive to steady, if slower, profit expansion rather than contraction.

What does the earnings slowdown mean for investors and sectors?

For equity investors, Goldman’s message is nuanced: prepare for slower growth but avoid excessive defensiveness. The bank argues that sector selection, not broad market timing, will drive returns through year-end.

Technology and communication-services firms may continue to deliver outperformance, though at a gentler pace, as investors reassess valuations after a year of AI euphoria. Healthcare, consumer staples, and financials could see relative strength given their stable earnings visibility. Industrials and materials may lag unless fiscal infrastructure spending accelerates.

Institutional flows suggest investors are already rotating toward quality and cash-flow reliability. Exchange-traded-fund inflows to defensive and dividend-yielding sectors have increased through September 2025, indicating a gradual repositioning. Foreign institutional investors (FIIs) remain net buyers of U.S. equities year-to-date, while domestic institutional investors (DIIs) have shifted toward short-duration fixed income. This split underscores a preference for tactical rather than structural risk-taking ahead of the earnings season.

How are markets reacting to Goldman’s latest guidance?

Market reaction has been broadly supportive. Following the report, S&P 500 futures held near record levels, reflecting confidence that decelerating growth does not equate to an earnings downturn. Traders noted that Goldman’s upgrade of its year-end target reinforced a “soft-landing” narrative that continues to underpin risk appetite.

Equities remain sensitive to yield movements, but volatility indices have stayed subdued. Analysts interpret this as evidence that investors are comfortable with an earnings normalization phase, provided inflation and rate expectations remain anchored.

Stock-specific dispersion is likely to widen. Companies that deliver solid beats and raise guidance could see disproportionate upside, while any high-profile misses—particularly in mega-cap technology—may trigger sharp corrections. For active managers, Goldman’s message effectively encourages barbell positioning between secular growth and defensive yield plays.

What historical parallels explain today’s transition phase?

The current moderation resembles prior mid-cycle slowdowns seen in 2015 and 2018, when earnings growth eased but avoided contraction. In both cases, equities ultimately stabilized as monetary policy and corporate fundamentals re-aligned. Goldman believes a similar script may unfold this time, with Q3 2025 marking the beginning of a plateau rather than a peak.

Historically, when earnings growth slows from double digits to mid-single digits while interest rates stabilize, the S&P 500 has delivered positive returns over the following twelve months more than 70 percent of the time. That statistical backdrop reinforces Goldman’s view that investors should stay invested but selective.

What’s next for the S&P 500 heading into 2026?

Looking forward, Goldman Sachs expects the earnings cycle to re-accelerate modestly in early 2026 as global trade conditions normalize and the AI monetization curve matures. The firm sees cumulative EPS growth of 8–9 percent for full-year 2026, with information technology, communication services, and energy contributing the largest gains.

Strategists also anticipate renewed merger and acquisition activity as balance-sheet cash piles are redeployed. Share-buyback authorizations among S&P 500 constituents are already trending 12 percent higher than the same period last year. Combined with dividend stability, these factors provide a buffer against valuation compression even if growth cools.

Goldman cautions, however, that valuations remain elevated relative to long-term averages, implying that future upside depends more on earnings delivery than multiple expansion. The firm’s base case envisions moderate total returns in the 6–8 percent range over the next twelve months, supported by steady profit growth rather than speculative exuberance.

Why a slower earnings season doesn’t mean the S&P 500 rally is over

Goldman Sachs’ assessment paints a picture of balance—earnings growth that is slowing but far from stalling. The S&P 500’s projected six-percent Q3 gain represents a normalization after an exceptional run, not a collapse. Investors may need to recalibrate expectations, but the underlying narrative remains constructive: resilient revenues, selective margin expansion, and manageable cost pressures.

If the coming earnings season delivers even modest upside surprises, it could validate the notion that U.S. corporates have successfully adapted to a higher-rate world. For long-term investors, this phase rewards patience and precision over panic—an environment where quality balance sheets, disciplined guidance, and sector diversification could quietly outperform the noise of short-term forecasts.