Goldman Sachs Targets 12% Gain for S&P 500: Here’s Why
Many investors get exposure to the S&P 500 through exchange traded funds (ETFs) like the SPDR S&P 500 ETF (NYSEARCA:SPY) or the Vanguard S&P 500 ETF (NYSEARCA:VOO). A prominent group of analysts expect these S&P 500 funds to perform well in 2026 — but then, you might or not agree with their predictions.
Analysts are generally optimistic about large-cap U.S. stocks, and Goldman Sachs (NYSE:GS) strategists are particularly bullish this year. They’ve set an S&P 500 price target that might convince you to load up on SPY and VOO right now.
At the same time, the Goldman Sachs strategists admit that there are warning signs in U.S. equities. With this in mind, we need to unpack the predictions and their justifications while also determining whether it’s too risky to invest in the S&P 500.
“Fed Easing” Will Lift Stocks
After sinking in 2022, the S&P 500 rallied 25% in 2024 and 18% in 2025. Evidently, investors are confident that the Federal Reserve’s interest rate hiking cycle from 2022 is now in the rear-view mirror.
Indeed, Goldman Sachs analysts cited “Fed easing” as a factor that they believe will “help propel the US stock market this year.” The Goldman Sachs analysts reported that, as of January 6, economists projected two 0.25% interest rate cuts for 2026.
On the other hand, funds like SPY and VOO seem to have already gotten a big boost based on interest rate cut assumptions. Besides, the Goldman Sachs analysts seemed to suggest that there’s no guarantee of rate cuts this year.
Thus, the analysts cited a potential “hawkish shift by the Fed” as one of the “biggest risks to an equity market rally.” Yet, Ben Snider, chief U.S. equity strategist with Goldman Sachs, assured that such a “hawkish shift” isn’t “likely in the near future.”
That’s a reasonable assessment as there are no signs of an imminent return to interest rate hikes. That’s one reason why it makes sense to own a few shares of SPY or VOO. Nevertheless, investors should consider the possibility that large-cap stocks have already priced in the assumption of two interest rate cuts.
Envisioning AI-Fueled Growth
Along with interest rate reductions, Goldman Sachs cited economic growth as a main driver of stock market gains. Just as he dismissed the threat of a potential “hawkish shift by the Fed,” Snider determined that “weaker than expected economic growth” is unlikely in 2026.
It’s probably not just a coincidence that the Goldman Sachs strategists expect U.S. corporate earnings per share (EPS) to increase 12% in 2026 and also predict a 12% return from the S&P 500. What will fuel this earnings growth, though?
Again and again, the Goldman Sachs analysts pointed to artificial intelligence (AI) technology investment as a growth driver. On this topic, Snider specifically cited “an emerging productivity boost” from AI adoption as a primary earnings growth catalyst.
Consequently, to buy into Goldman Sachs’ 12% EPS growth and 12% stock market rally projections, you’ll need to buy the premise of continued, strong AI adoption. It’s reasonable to assume some AI-driven growth and hold SPY or VOO based on this, though a 12% earnings expansion might not happen as expected.
Keep an Eye on Valuations
Despite their generally positive outlook, the Goldman Sachs analysts are keeping a close watch on U.S. stock valuations. After multiple years of strong S&P rallies, large-cap stocks may be expensive now.
For what it’s worth, the Goldman Sachs strategists noted that the S&P 500 “trades at a forward price-to-earnings (P/E) ratio of 22x.” Furthermore, this P/E ratio “matches the peak multiple in 2021 and approaches the record 24x multiple in 2000.”
This, Snider warned, could be a setup for a letdown. “[E]levated multiples are hard to ignore,” he cautioned, and “they increase the magnitude of potential equity market downside if earnings disappoint expectations.”
SPY and VOO investors shouldn’t disregard Snider’s point here. He still envisions EPS and share-price growth even with elevated valuations, but Snider isn’t just ignoring the risks.
Invest, but Prepare for Disappointment
So again, it makes sense to hold some shares of SPY, VOO, or another S&P 500 tracking fund, but there’s no need to go overboard. Moderate position sizing will allow for the possibility that richly valued stocks might decline if earnings growth disappoints.
In the final analysis, the Goldman Sachs analysts are making reasonable bullish arguments. There will probably be interest rate cuts and some earnings growth based on AI technology adoption. For investors, this means it’s sensible to own a few SPY or VOO shares while also preparing for a disappointment-driven drawdown if it occurs.