US equity market valuation and investor positioning: US equities trade at a more normal forward P/E, but the market is pricing caution on the durability of current profits

Overview

This US equity strategy report examines what investors are paying for in the S&P 500 and why valuations have contracted despite strong earnings and index returns. Goldman Sachs argues that valuation is now more dependent on interest rates and the sustainability of unusually strong profitability, while stock selection increasingly hinges on differentiated views of longer-term sales growth.

Core views

Macro uncertainty has reduced investor positioning and damaged market breadth even though the headline index has remained resilient. Goldman Sachs' composite US equity positioning indicator, which combines nine measures across hedge funds, mutual funds, retail, and other investors, has fallen to -0.9, equal to the March market-low reading. The report says positioning is not depressed against its longer-term history, but it leaves investors room to add exposure if the macro backdrop improves. At the same time, the S&P 500 is only 1% below its mid-August record high whereas the median constituent is 16% below its own 52-week high. This has pushed the firm's breadth measure—the gap between the index's and median stock's distance from their highs—to its lowest level since the Dot-Com Bubble. Goldman Sachs sees potential for broad upside and a catch-up by recent laggards if uncertainty declines, but warns that narrow breadth raises the likelihood of continued Momentum-factor volatility. The report explains that valuations have become less demanding on a forward earnings basis, but this does not eliminate concerns about earnings quality. The S&P 500 has gained 13% year to date while consensus forward 12-month EPS has risen 29%, reducing the forward P/E by 13% to 19x from 23x a year ago. The current multiple matches its 10-year average. Higher interest rates are one cause: a higher discount rate lowers the present value of future earnings, while the equity risk premium has remained near 3% and the earnings-yield versus real-10-year-Treasury yield gap has been broadly steady. Rate volatility is also a near-term challenge: the real 10-year Treasury yield rose 53 bp in the past month, crossing a two-standard-deviation speed limit that Goldman Sachs associates historically with negative equity returns. Goldman Sachs argues that the lower P/E also reflects skepticism that current profits are sustainable. Hyperscalers are on track to spend $800 billion on capex this year, supporting semiconductor and other AI-infrastructure earnings; the firm estimates this spending is driving roughly half of S&P 500 earnings growth this year. As hyperscaler capex growth slows and depreciation rises, that contribution should fade and ultimately become a drag. Semiconductor supply constraints and accounting gains on appreciating private-equity stakes have also aided recent earnings but are expected to contribute less going forward. The report notes that cyclically adjusted P/E based on trailing 10-year earnings is near historical extremes—below the 1999-2000 peak but above 2021—whereas the market's free-cash-flow yield is 3.3%, below the 4.4% historical median but not abnormal by recent-decade standards. This distinction matters because free cash flow is less affected by the timing mismatch between current capex and later depreciation. Its valuation model combines Treasury yields, inflation, and ROE. At 19x, the S&P 500 trades about 10% below the multiple implied by those variables at present. Goldman Sachs interprets this as justified skepticism about current profitability rather than an excessively pessimistic earnings outlook. With current inflation and interest rates, a 19x P/E is consistent with roughly 22% ROE, more than 200 bp below the current level but still equal to 2021 as the highest level on record. Within the market, profitability now explains nearly all variation in sector valuation multiples, and the relationship between sector P/B and ROE is as strong as it has been in recent decades. For factor and stock-selection implications, Goldman Sachs says narrowing valuation dispersion weakens the case for further Value-factor outperformance. Its sector-neutral long/short S&P 500 Value factor returned more than 25% since mid-2025, helped by accelerating growth and initially wide valuation dispersion. Dispersion is now narrow, a condition historically associated with weak forward Value returns, and the firm's economists expect stable near-trend growth, another backdrop usually linked to below-average Value returns. At the company level, a Russell 1000 cross-sectional regression, excluding Financials, Real Estate, and Biotech, shows revenue growth remains the principal valuation driver. Investors are paying an above-average premium for three-year-ahead sales growth but a below-average premium for one-year-ahead growth, reflecting uncertainty over the durability of current earnings and possible future AI disruption. Goldman Sachs therefore emphasizes differentiated long-term growth views, screening companies above $5 billion in market capitalization with average three-year-ahead sales growth above 10%, then ranking the top and bottom 20 by the coefficient of variation in analyst three-year sales forecasts.

Analysis framework

Goldman Sachs combines a nine-input positioning indicator and a market-breadth measure with forward earnings, valuation, interest-rate, profitability, and cash-flow analysis. It uses a macro P/E model based on Treasury yields, inflation, and ROE; compares valuation measures based on forward, cyclically adjusted, and free-cash-flow earnings; evaluates factor conditions through valuation dispersion and growth expectations; and uses a cross-sectional Russell 1000 regression plus analyst-estimate dispersion screens to identify where long-term growth views differ most.

Methodology notes

• Valuation methodsDDM (Dividend Discount Model)

  Multi-stage S&P 500 dividend discount model used to derive the equity risk premium.

  The model solves for the discount rate that equates the index's estimated fair value to its current price, then subtracts the 10-year Treasury yield to calculate the equity risk premium.

• Corporate Fundamentals and FinanceFree cash flow analysis

  Free-cash-flow yield comparison with historical norms.

  Goldman Sachs uses free cash flow to assess valuation without some of the accounting effects created when current capex precedes future depreciation expense.

• Quantitative, Factor, and Portfolio TheoryMulti-factor model

  Composite investor-positioning indicator and cross-sectional valuation regression.

  The positioning measure combines nine investor-flow and positioning inputs, while the regression assesses which fundamentals, especially sales growth, explain relative valuation multiples across Russell 1000 companies.

• Event-Driven and Behavioral FinanceFund-Flow and Positioning Analysis

  Investor positioning and market-breadth analysis.

  The report uses positioning and the divergence between the index and median stock to assess whether investor exposure and participation could amplify future market moves.

Key data

• US equity investor positioning indicator-0.9Matches the March market-low reading.
• Median S&P 500 stock versus 52-week high16% belowCompared with the aggregate S&P 500 at 1% below its mid-August record high.
• S&P 500 forward P/E19xDown from 23x a year ago and equal to the 10-year average.
• S&P 500 year-to-date return and forward EPS change13% return; 29% increase in consensus forward 12-month EPSThe gap produced a 13% decline in the forward P/E multiple.
• Real 10-year US Treasury yield change+53 bpIncrease during the past month, beyond the report's historical two-standard-deviation speed limit for equities.
• Hyperscaler capex$800 billionExpected this year; estimated to drive roughly half of S&P 500 earnings growth.
• US equity free-cash-flow yield3.3%Below the 4.4% historical median but comparable with many recent-decade periods.
• ROE consistent with a 19x S&P 500 P/ERoughly 22%More than 200 bp below the current ROE level.
• Goldman Sachs S&P 500 forecast8,000 at year-end 2026; 8,700 in 12 monthsThe table shows 4% return to the year-end target and 13% to the 12-month target.

Impact & implications

The report frames the market as neither simply cheap nor uniformly expensive: the forward multiple has normalized, but it embeds doubt about unusually strong profitability. It sees scope for a broader advance if macro uncertainty recedes, while suggesting that sharp yield moves, narrowing breadth, fading AI-capex support, and low valuation dispersion could make index and factor outcomes less straightforward. For stock selection, the report places greater importance on differentiated assessments of durable three-year revenue growth.

Risks

• A rapid increase in real Treasury yields has historically been associated with negative equity-market returns.
• AI-related capex support to earnings may fade as hyperscaler spending growth slows and depreciation expense rises.
• Semiconductor supply constraints and gains from appreciating private-equity stakes may contribute less to future profits.
• Narrow market breadth increases the likelihood of continued Momentum-factor volatility.
• Narrow valuation dispersion and stable near-trend growth may be unfavorable for forward Value-factor returns.

What to watch

• Whether macro uncertainty declines enough for currently cautious investors to add equity exposure.
• Changes in real Treasury yields and the speed of rate moves.
• The path of hyperscaler capex growth, depreciation expense, and its contribution to S&P 500 earnings.
• Whether market breadth broadens beyond AI-supported index leaders.
• Dispersion in analyst three-year sales-growth forecasts for high-growth Russell 1000 companies.