Dot-com deja vu? Why Goldman Sachs is calling time on the momentum trade
SPY•Goldman Sachs said slowing AI spending, high interest rates and energy prices could crimp US profit growth, and warned investors about momentum exposure as market breadth remains narrow. It expects S&P 500 earnings growth to slow heading into 2027.
1. Profit growth outlook
Goldman Sachs said in an October 16 note that a slowdown in artificial intelligence spending is poised to join high interest rates and energy prices in crimping US profit growth. Early third-quarter results showed 53% of S&P 500 companies beating consensus profit estimates, down from a 64% average over the past four quarters and above the 50% long-term norm.
2. Narrow market breadth
The brokerage said equity market breadth is near its narrowest point since the dot-com bubble, leaving the broader market vulnerable to sudden drops in recent winners as borrowing becomes more expensive. Goldman expects S&P 500 earnings growth to slow heading into 2027 as capital expenditure from AI hyperscalers begins to diminish. Analysts led by Ben Snider said narrow breadth makes momentum exposure a risk, as either recent outperformers fall or laggards catch up.
3. Hedging recommendations
Goldman said the momentum unwind has already hit tech hardware and AI suppliers, including Coherent, Lumentum Holdings, Hewlett Packard Enterprise, Super Micro Computer and Dell Technologies. It recommended rotating toward consumer-facing laggards and defensive, cash-generative stocks, naming Tyson Foods, CVS Health, Kroger, Abbott Laboratories and Merck.
