Goldman Sachs (GS.US) warns: 2027 US stocks face the biggest supply shock in 2000

According to Woofun AI, Tony Pasquariello, the global head of the hedge fund business at Goldman Sachs (GS.US), issued a clear warning that although the main trend in the US stock market has not broken, the countdown has begun. It is expected that the S&P 500 will complete the final round of gains before turning around, and then 2027 will face the biggest net stock supply shock since the Internet bubble burst in 2000.

The three core variables that have driven the strong performance of US stocks over the past four years—profit growth, capital flow, and AI narrative—have deteriorated at the same time. Pasquariello pointed out in the latest weekly report that although Goldman Sachs predicts that S&P EPS will still achieve about 18% growth in 2027, and the S&P 500 profit growth rate in the second quarter is expected to reach 33% and is expected to follow 35% in the third quarter, the fastest growth rate in 30 years other than the recovery period after the recession, the market is highly sensitive to the rate of change. He stressed that the tension between second-order derivatives and first-order derivatives is becoming more complex, and it is becoming more and more difficult to imagine that profit can once again provide the kind of upward convexity enjoyed in recent years.

The more critical variable is that Goldman Sachs's profit forecast is extremely sensitive to AI capital expenditure, and this week's developments have clearly increased the downside risk of this forecast, and the peak profit growth rate has made upward movement unsustainable.

The signals at the capital flow level are even more serious. Data compiled by Woofun AI shows that in the past 20 trading days, hedge funds have sold global AI stocks at the fastest rate in more than five years, deviating from the average by more than 3 standard deviations, and this week's sell-off has already entered a “full outbreak” state. Buyers also experienced a collective contraction. The weakening of corporate repurchase efforts, the contraction of overseas investors' purchases, and mechanically followed sell-offs with quantitative strategies such as CTAs, all formed a “buyers' strike.” Even more alarming is the supply pressure in 2027: Pasquariello made it clear that net supply growth in US stocks in 2027 is expected to reach its highest level since 2000. The resonance between large IPO pipelines such as SpaceX (SPCX.US) and Anthropic and corporate cash flow shifts (which require prioritizing capital expenditure rather than repurchases) will put pressure on both supply and demand sides.

Although the volume of repurchases has recovered to around $5 billion a day, and he is relatively optimistic about the financial situation for the eight weeks of the end of the year, this short-term support is difficult to overcome the structural pressure in 2027.

There is a rift in the AI narrative, and the left tail risks expanding. Market consensus shows that the capital expenditure growth rate of tech giants will drop from 96% this year to 44% next year. The net free cash flow consumption of hyperscale cloud vendors reached US$31 billion in the third quarter, and market unease about their continued “negative free cash flow” continues to accumulate. Pasquariello pointed out that AI capital expenditure was previously the “rocket fuel” of the market, but now the market is being forced to carefully examine whether construction intensity can continue, which has introduced more left-tail risks to a market that originally almost only chased the right tail.

Notably, in the same week, Rich Privorotsky, another strategist at Goldman Sachs, was also titled “1998 or 2000?” The report cites a comparison with the peak of the internet bubble in the current round, which means there were two hidden responses within Goldman Sachs to the 2000 tech stock crash in the same week. Privorotsky tends to compare this round of adjustments to 1998 rather than 2000, and sees this as a liquidity event rather than the end of a cycle, but he also admits that the disturbing similarities with 2000 are the scale of expenses and the uncertainty of returns.

Meanwhile, the Nasdaq 100 index once fell 6.36% in a single day this week, the biggest one-day decline since the COVID-19 pandemic. Hedge fund earnings during the year have almost completely rebounded. In terms of valuation, after this round of valuation, the forward price-earnings ratio of the NASDAQ 100 and the Philadelphia Semiconductor Index is lower than the level before ChatGPT was released in November 2022, about 4 valuation multiples cheaper. The forward price-earnings ratio of NASDAQ 100 fell 18.4 times, the lowest since 2020.

Recently, however, two investors whom he deeply endorses told him that “the stock market is too complacent compared to the credit market”. Combined with the triple combination of the December rate hike being re-included in discussions, the pressure on AI-related high-yield bonds, and the biggest net supply pressure in 2027, the credit market is taking the lead in pricing construction financing issues, and whether the stock market has fully reflected it is still an unresolved core issue.

Tony Pasquariello's final conclusion is clear and cautious: the main trend of the bull market still exists, and there may be a final rise at the end of the year, but the “inflection point” has been written into the outlook judgment in text form, and 2027 will be a “more flexible and adaptable” trading environment. As the benchmark level of index volatility tends to rise, investors need to be wary of the upward convexity of AI infrastructure “shovels and pickaxes” being compressed, and re-evaluate position structures in the context of increasing imbalance between supply and demand.