Goldman's S&P 500 Warning: Earnings Headwinds Ahead — Full Breakdown & Transcript

[00:00] Goldman Sachs is now warning us about headwinds for the S&P 500, and these are not to be bearish. They are to indicate why there is reason to be cautious over the next 12 months, as we've

[00:13] got a lot of lapping to do. Holy smokes. Take a look at some of their commentary here. First, they argue the S&P 500's forward price-to-earnings ratio sits at 19, which is in line with its 10-year average.

[00:25] But they say trend earnings have only exceeded the level we're seeing right now at the peak of the dot-com bubble. We don't like comparing back to the peak. Basically what they're saying is if you look at something like the CAPE ratio,

[00:39] things look really expensive right now on how much earnings growth we have relative to history. In other words, there's something weird going on promoting earnings. Okay, so why are we promoting earnings like this?

[00:53] Well, they argue that one of the reasons you're seeing earnings explode is because of the following. They say AI's impact on corporate earnings has currently experienced a very little depreciation drag.

[01:10] The easiest way to see this is by going forward to one of the charts they have on this, and I'm going to show you this right here. So take a look at this argument. Here they argue, we estimate the drag from hyperscaler depreciation expenses on the S&P 500 earnings growth will grow in 2027, offsetting the nearly half of the 11 percentage point boost to earnings expected from CapEx.

[01:35] Okay, in English, we're expecting a lot of capital expenditures growth next year to boost earnings, 11 percentage points. But half of that is going to be absorbed by depreciation write-offs, and we didn't have as many depreciation write-offs in 2026, this year.

[01:53] Here, you can see this graphically. So you have the gray right here is depreciation, which are write-offs to earnings, right? They're negative earnings.

[02:06] And this is normal. Depreciation in chip hardware is classic. You're typically going to write chip hardware down to zero over the span of sometimes three years, sometimes five years, sometimes seven years.

[02:19] Data centers lately have been getting even more of an expanded time frame. But you're generally going to write this hardware down to zero, where you say at some point in the future, this graphics card is going to be worth zero. If it still makes me money, great.

[02:31] That's just a W on top of the residual value, but I've written this cost down to zero. You do this in real estate as well. The alternative is, or like the difference between real estate and chips, is that chips do eventually go to zero.

[02:45] Like at some point, the useful life of a chip is actually zero. And you just throw it away or recycle it. The residual value of a house, considering that your expenses to maintain that property are actually being spent on maintaining that property,

[03:00] the residual value of the house remains, even though on a tax basis you're telling the government, I'm depreciating it to zero. It is one of the greatest tax shelters in America because you are doing the same thing you do to chips,

[03:13] except you're left with something that has probably actually appreciated in value. That is very abnormal for chips, but that's what's been happening. Over the last year, we've actually seen chip prices skyrocket. My company, Reinvest, we've got over 50 different compute machines running

[03:29] with RTX 6000s, we've got Blackwell chips with 5090s, we've got a bunch of CPUs running. I mean, we have a lot going for the artificial intelligence that we're building. And, I mean, frankly, we're just starting to scale what we're building.

[03:42] We should call it superintelligence per Trump. But what's remarkable is our investments in GPUs over the last year have doubled in value. So our balance sheet could theoretically look like it's doubled in value on the basis of GPU values.

[03:57] That's not sustainable, right? Typically, you write these down. But that's the argument that Goldman is making here, is that capital expenditure or depreciation write have been really low in 24 25 and 26 and they about to basically double in 27 That going to make earnings growth for the S 500 start looking like a drag And so that where they make this sort of warning and they argue

[04:23] hey, be careful. Some of that CapEx spending is now going to start feeling like a drag. In addition to that, tech companies have generated over $150 billion in other income. We have flagged

[04:36] this already on this channel, so it's worth bringing it up again, related to equity investments in the second quarter of 2026, lifting S&P 500 earnings by 12%. We expect additional

[04:48] other income in the second half of 2026, but these accounting earnings should diminish in 2027. Let me give you an example of how that works. Meta owns call options on A&D.

[05:04] AMD's stock just skyrocketed so the value of Meta's call option known as warrants because they're issued by a company have skyrocketed

[05:16] especially since Meta can exercise those at a one penny cost for one penny they can buy shares via their call options of AMD that's obviously dilutive to AMD shareholders

[05:28] but it's a big win to Meta that is going to show up as an other income at Meta Because when you own, this is another thing that's different between stocks and real estate. Because I do both, I feel like I have the luxury of realizing how things are different.

[05:42] When you own stocks or options, you have a way of measuring that on a quarterly basis, and you report that into your earnings. So when you make gains on these equity investments, like META will report for A&B,

[05:58] you actually report that on your financial statements every quarter. Real estate is different. Real estate, you record real estate on your balance sheet at what you bought it for, plus how much you invested into it, minus depreciation.

[06:11] You don't actually update. You don't go to your income statement and go, oh, we got a good deal. We're going to increase our income statement by $10 million because we got a good deal. You don't do that. Or there was appreciation. You just don't do that in real estate.

[06:24] It is a big difference between real estate and stocks. So real estate historically looks undervalued when you look at income statements or balance sheets, whereas stocks historically look marked to value.

[06:37] And of course, because stocks have been rocketing up, you're getting the benefit of marking to market. It's called marking to market. It's basically marking to value. Okay, so a lot of people don't recognize the difference between real estate and stocks, and that's okay.

[06:51] It just was knowing. Semiconductor share prices have recently lagged the trajectory of near-term EPS estimates. This has been my take as well, that we have really been almost deserving of a hardware 2.0 rally,

[07:04] mostly because last summer we talked about, or this past summer, we talked about how SpaceX has created this massive sucketing, and so did Google. Google raised over $80 billion. SpaceX raised over $100 billion. That money just gets turned around and basically handed to Jensen or the ASIC manufacturers,

[07:21] for Google TPUs or otherwise, or even to some extent AMD, although SpaceX does have an exclusive partnership with Nvidia now, it's worth noting that money that was raised is going to get spent on hardware, and that's why we believe hardware deserves a rally.

[07:35] And so I agree that there appears to be a discount relative to what would be implied per corporate profitability. This is why I say that hardware stocks look pretty cheap, and that software has caught up a little bit,

[07:48] but hardware has seriously been left behind. Obviously, there are IPO canaries in the coal mine that we want to pay attention to and watch. That said, the degree to which the current U.S. equity market is expensive depends in large part on the sustainability of recent earnings rates.

[08:02] Well, this is always how the market works. It's like, it's really easy to grow earnings bigly, but at some point, they're all going to turn negative. These growth rates won't be sustainable. Lenar, for example, just went through four years of negative earnings per share growth.

[08:17] We talked about that in the Course Member Livestream this morning. and what's interesting about that is in four years of negative earnings per share growth the stock has basically come straight down you can see it peak down in 2024 This is when you started getting negative earnings getting reported 24 25 26 We now on

[08:38] a fourth year of reporting negative earnings. The stock market doesn't like that. Eventually, that negative earnings growth is going to hit the hardware sector, whether it's NVIDIA, AMD, memory stocks, or whatever. The point is, we're probably just not there yet, or

[08:52] At least we're not sure that we're there yet. Current estimates are that we don't really see a turn until 2028 to 2030. That could get extended. You know, forward earnings guidance.

[09:04] Sometimes a little bit of a shot in the dark. But, basically, this aligns with my hardware 2.0 thesis. And I believe companies like AVGO, Meta, NVIDIA have all been left behind with valuations of under one tag. It is interesting.

[09:16] Obviously, yesterday, Meta really took off. But that's okay. It's still pretty dang cheap. probably at right now their valuation is probably like a 1.1 or 1.15 tag. It's still very cheap. So in other words, you've got a semiconductor, a margin expansion,

[09:30] earnings from private investment gains, AI CapEx, basically why things look good right now are because of these three things. Will those things last? That's the big question. Goldman Sachs forecasts that hyperscalar CapEx could grow at a slower rate in the coming years,

[09:45] which would result in decelerating earnings growth from much of the AI infrastructure complex. and a fading tailwind to S&P 500 earnings. This is where we have some argument to having a little bit of a balanced portfolio,

[09:58] where, yes, you want to make money off of hardware. Yes, Oracle has probably bottomed. Yes, hardware has been left behind. But do you want to sell out of all of your other potential plays just because we expect a hardware rally?

[10:10] Probably not, you know, because everything can go up with the ship, just like if we hit recession, everything's going to go down with the ship. But that's the stock market. Real estate, on the other hand, we actually expect will do quite well this next cycle.

[10:25] And that's because if we look at the dot-com bubble, we saved this. And I think this is probably one of my favorite pieces about real estate. And yeah, I'm a little bit of a real estate shill, but I think the data is fair. If you just look at this component of the dot-com era, the NASDAQ 100 between March of 2000 to October of 2002 fell 83%.

[10:45] But real estate was actually up around that same time. The worst year that real estate had during the dot-com bubble was a negative 1% year in 2021. So it's actually really remarkable that real estate performed very well during the dot-com bubble.

[11:03] I think, while real estate can have recessions, obviously we all remember 2008, we don't have the leverage that we see in real estate right now. And that's why what I like is I like, hey, go make as much money as you can from artificial intelligence, from software, from hardware stocks, or whatever.

[11:21] Reinvest some of that into real estate. Okay? That's my pitch. And I'm not even trying to sell you a product. I'm not trying to sell you anything right now. I don't have an affiliate. I don't have a sponsorship. You can invest and reinvest right now.

[11:33] The whole point is just to get you thinking about some diversification during a tech bubble, just like the dot-com bubble. It's not a bad idea. I think this is wise. I think we're probably close to peak yields,

[11:46] and real estate wins from yields coming down over time. If you take a look at this, their valuation targets are that in the 3 to 6 to 12 months out, they still see the S&P 500 rising to 8,000, 8,300, and 8,700.

[12:01] I agree with this. I actually think we still have a pretty decent growth trajectory ahead of us for at least the next six months. I'm pretty bullish for the next six months.

[12:13] ADP this morning came in hotter than expected, which of course is going to slow down the decline in yield, but it means one of our canaries in the coal mine is still singing like crazy right now. It's not choking on any kind of carbon monoxide yet.

[12:25] It's doing great. Obviously, there's investor uncertainty. I wrote this, mind you, on Sunday. Like my little notes here, I wrote, buy the fear. because I've maintained this for the last three weeks. And I'm like, buy, buy, buy.

[12:37] This is all nonsense. Buy the day, buy the day, buy the day. And we've been buying. Obviously yesterday was quite rewarding But this is I feel like still relevant because we getting a lot of information on perspectives that headwinds that could come you know maybe six months

[12:51] out, and then the six months thereafter. So, sort of like the six months forward issues that we're dealing with. So, those are next year things. Then we left some little ghoulsy notes over here, but those are less important for this.

[13:03] There is a second Goldman piece that's worth referring to, and this is just a note here. This is probably, I really shouldn't have left this at the end of this segment here, but this is, you know what, this will be a benefit to all of you who made it this far in this.

[13:18] This is probably the most bullish thing right here. And just like Brandon says, what's the Halo man saying? You know what the Halo man is saying. Buy the dip. This right here is actually very bullish.

[13:32] Goldman Sachs' private bank indicates they are at the 34th percentile for leverage, which means they are actually at the low end of leverage right now. which means we're not over leveraged. It means what we saw yesterday was not a short squeeze.

[13:44] It means the gains we saw yesterday were probably not temporary. They're probably just the beginning of the hardware 2.0 rally. And unfortunately, that makes me more bullish, which I didn't think I could get even more bullish,

[13:56] but it does make me quite optimistic. So I liked seeing this. I was optimistic about this. Again, I don't want to sound like a shill for the market. I always try to put my bias out there. Some of the stocks we mentioned here, we've got exposure to.

[14:09] So, again, I maintain this relatively nominal relative to our real estate exposure, but that's because that positioning is what I call tenure positioning. I really believe this, that people hate real estate so horribly right now that, you know, if AI crashes and collapses, rates are going to come down really fast.

[14:32] That's going to benefit real estate. And because you have somebody like Kevin Warsh who isn't going to run the money printer, rates are going to have to become structurally lower to incentivize growth.

[14:44] Because even if AI doesn't crash and you just get AI disinflation, or eventually deflation, that's also a benefit to real estate in an environment you're not printing money. Like, best case scenario,

[14:56] you get rates that are structurally lower than they've ever been before because you're trying to incentivize growth through the bond market, and the only way to do that when the money printer isn't running at a lower rate. That is a clear, hands-down, win-to-real estate and fraud position for that 10-year play.

[15:09] Does that mean I don't think there's money to be made over the next six months? Oh, man, I still think there's a lot of money to be made in the stock market. So that's my take. I don't know. I think that's as transparent as you can be about it all. But, yeah, I mean, am I, you know,

[15:21] were we salivating a little bit about Lenore this morning in the course member live stream? Yeah. You know, obviously we had a lot to talk about regarding Lenore. We did some fundamental analysis on it. You know, is it the bottom yet? We don't know. I don't want to give away all the alpha here, but, you know, Renard's being up 4% today.

[15:37] Getting to the point where at some point it's going to be at the bottom. We'll just leave that little carrot dangling, and then we'll talk more about intentions in the future. But that gives me, I think that gives us all a nice little breakdown of what was going on with his Goldman piece.

[15:53] It sort of headwinds for the S&P 500 next year. So this is where I call it, just like we started, cautious optimism. and in the very near term, the most bullish thing I see is this right here because it means people haven't leveled up yet.

[16:07] You know what this means? And this is really what you'll leave that thought hanging on is no euphoria yet. People actually have some fear. I like buying that kind of stuff.

[16:21] You know, we did an analysis of sentiment, of comments on my videos and we have found that people have become more fearful as I have become more bullish. Either they're inverse trading me,

[16:33] which means they're wrong so far. Maybe that's right. Or people are just bearish and I'm looking at the fundamentals like she shouldn't be bearish right now. Not yet. It's too soon. So that's why I tell you about advertising.

[16:45] You need to change each other's view. I feel like nobody else knows about this. We'll try a little advertising and see how it goes. Congratulations, man. You have done so much. People love you. People look up to you. Kevin, pass that there. Thanks, Alan. And you two, meet Kevin.

[16:57] Always great to get your take. you