Goldman Sachs: The 2027 Bull Market in U.S. Stocks Has One Last Surge, But What Follows Resembles the Pre-Burst of the 2000 Bubble

In 2027, the market will face the largest net stock supply shock since the burst of the 2000 internet bubble.

Written by: Xu Chao, Wall Street Insight

A market turning point is approaching. Tony Pasquariello, global head of hedge fund business at Goldman Sachs, has warned that while the main trend of the U.S. stock bull market has not yet broken, it has entered a countdown. He expects the S&P 500 index to complete its final round of gains, after which it will face the largest net stock supply shock since the burst of the 2000 internet bubble in 2027.

In his latest weekly report, Pasquariello pointed out that the three core variables driving the strong performance of U.S. stocks over the past four years—profit growth, capital flows, and AI narratives—have all deteriorated in marginal direction. He explicitly stated, "The S&P is expected to make one last push before the turning point, but 2027 is destined to be a year of poorer returns," and warned that the benchmark level of index volatility will trend upwards.

Notably, in the same week, another strategist at Goldman Sachs, Rich Privorotsky, also referenced comparisons to the peak of the internet bubble in his report titled "1998 or 2000?"—indicating that within the same week, there were two implicit echoes of the 2000 tech stock crash within Goldman Sachs. Meanwhile, the Nasdaq 100 index experienced a single-day drop of up to 6.36%, the largest single-day drop since the COVID-19 pandemic, with hedge funds nearly completely reversing their gains for the year.

Profit Growth Peaks, Upward Momentum Difficult to Sustain

On the profit side, the S&P 500 index saw a profit growth rate of 33% in the second quarter, with the third quarter expected to reach 35%. He noted, "This is the fastest profit growth in 30 years, except during recovery periods following economic recessions."

However, a slowdown in growth has become a high-probability event. Pasquariello admitted that the market is highly sensitive to changes in rates, stating, "The tension between the second derivative and the first derivative is the core contradiction I repeatedly weigh, and this contradiction is becoming increasingly complex." Although Goldman Sachs predicts that the S&P EPS can still achieve about 18% growth next year, historical data shows that the bullish win rate still exists, but he clearly stated: "It is becoming increasingly difficult to imagine profits providing the kind of upward convexity we have enjoyed in recent years."

He also specifically pointed out that Goldman Sachs' profit forecasts are "extremely sensitive to AI capital expenditures," and recent developments have significantly increased the downside risks to those forecasts.

Deteriorating Capital Conditions, 2027 Net Supply to Reach New High Since 2000

The signals from capital flows are even more severe. Pasquariello wrote that the market has been absorbing broad and deep selling pressure for the past three months, and this week the selling has entered a "full-blown" state. According to Goldman Sachs' main brokerage data, based on the past 20 trading days, hedge funds have sold global AI stocks at the fastest pace in over five years, deviating from the mean by more than three standard deviations.

Buyers are also collectively retreating. The weakening of corporate buybacks, the contraction of overseas investor purchases, and the mechanical follow-up selling by quantitative strategies such as CTAs have collectively formed a "buy-side boycott."

More alarmingly is the supply pressure in 2027: Pasquariello explicitly pointed out that the net supply increase of U.S. stocks in 2027 is expected to reach the highest level since 2000. The resonance of large IPO pipelines such as SpaceX and Anthropic with corporate cash flow shifts (which need to prioritize capital expenditures over buybacks) will simultaneously create pressure on both the supply and demand sides. While he holds a relatively optimistic view on the capital situation in the last eight weeks of the year, noting that buyback volumes have rebounded to about $5 billion per day, this short-term support cannot hide the structural pressures of 2027.

Cracks in AI Narratives, Left Tail Risks Expanding

Pasquariello categorized AI narratives as "the most difficult variable to clarify." As the market entered this week, there was a general expectation that the capital expenditure growth rate of tech giants had peaked—market consensus shows that the relevant growth rate will drop from 96% this year to 44% next year; meanwhile, ultra-large cloud providers consumed a net free cash flow of $31 billion in the third quarter, and market anxiety over their continued "negative free cash flow" has been accumulating.

He summarized the impact of this week's developments on the AI outlook in four points: First, AI capital expenditures were previously the "rocket fuel" for the market, but the market is now forced to seriously examine whether the intensity of construction can be sustained; second, the outlook for AI capital expenditures has widened the distribution of possible outcomes, "introducing more left tail risks to a market that was previously almost solely chasing right tail risks"; third, if the pace of construction slows, the cycle may extend, but a cautiously optimistic stance can still be maintained in the medium term; fourth, the upward convexity of targets related to AI infrastructure, such as "shovels and picks," is difficult to avoid being compressed.

For the optimistic Rich Privorotsky, he tends to liken this round of adjustments to 1998 rather than 2000, believing it to be a liquidity event rather than the end of a cycle, stating, "Delaying data center construction does not equate to destroying demand for computing power." However, he also acknowledged, "The unsettling similarities to 2000 lie in the scale of spending and the uncertainty of returns"—which echoes Pasquariello's warning about supply in 2000.

Valuation Repair Provides Buffer, But Credit Market Has Already Sounded the Alarm

Pasquariello did not shy away from the core argument of the bulls: after this round of valuation killing, "the market is currently at a reasonable valuation level." He pointed out that the forward P/E ratios of the Nasdaq 100 and the Philadelphia Semiconductor Index are both below the levels prior to the release of ChatGPT in November 2022, approximately four valuation multiples cheaper, with the forward P/E ratio of the Nasdaq 100 dropping to 18.4 times, the lowest since 2020.

However, at the end of his report, he disclosed a deeper concern: two highly regarded investors recently told him, "The stock market is too complacent relative to the credit market." Combined with the reintroduction of December rate hikes into discussions, the pressure on AI-related high-yield bonds, and the triple overlap of the maximum net supply pressure in 2027, the credit market is leading the way in pricing the construction financing issues—whether the stock market has fully reflected this remains a core unresolved question.

Pasquariello's final conclusion is clear and cautious: the main trend of the bull market still exists, there may be one last surge at the end of the year, but the "turning point" has already been written into the outlook judgment, and 2027 will be a trading environment that "requires more flexibility to adapt."