Goldman Sachs Research is projecting that U.S. stocks will deliver their fourth consecutive year of gains in 2026, with the S&P 500 expected to produce a 12% total return including dividends. While impressive by historical standards, the forecast represents a notable deceleration from the 18% gain of 2025 and the 25% surge in 2024.

The more significant shift, however, isn't the magnitude of returns but their source. Goldman's strategists expect 2026 gains to be driven primarily by earnings growth rather than multiple expansion—a transition from momentum-driven markets to fundamentals-driven returns that could define this phase of the bull market.

The Case for 12% Returns

Goldman's forecast rests on several interrelated assumptions about the economy and corporate profits:

Earnings Growth Drives Returns

With the S&P 500 already trading at elevated price-to-earnings multiples, Goldman sees limited room for further multiple expansion. Instead, returns will need to come from actual profit growth—companies earning more money, not investors paying higher prices for the same earnings.

Goldman projects S&P 500 earnings per share will grow approximately 9-11% in 2026, driven by continued economic expansion and productivity gains from AI investments. This earnings growth, combined with modest dividend yields, gets them to the 12% total return figure.

Economic Backdrop

The forecast assumes a "soft landing" scenario where economic growth continues at a moderate pace without tipping into recession. Key assumptions include:

  • GDP growth: 2-2.5% real growth, supported by consumer spending and business investment
  • Inflation: Continued gradual decline toward the Fed's 2% target
  • Fed policy: Additional rate cuts, though fewer and slower than markets previously expected
  • Labor market: Unemployment stable around current levels

"Earnings growth is likely to drive the rally amid a solid economy and continued easing by the Federal Reserve."

— Goldman Sachs Research

Why Not Higher?

Some investors might wonder why Goldman isn't more bullish after two years of strong returns. Several factors constrain their outlook:

Valuation Starting Point

The S&P 500 enters 2026 trading at roughly 21-22 times forward earnings—above historical averages and leaving little room for multiple expansion. When stocks are expensive, future returns typically moderate.

Tech Concentration

Goldman notes that the top tech stocks accounted for 53% of the S&P 500's return in 2025, creating concentration risk. Any stumble by the "Magnificent Seven" could disproportionately impact index returns.

Policy Uncertainty

Tariffs, fiscal policy changes, and regulatory shifts create uncertainty that could weigh on business investment and consumer confidence. While Goldman's base case is benign, they acknowledge significant tail risks.

Rate Environment

With the Fed likely to cut rates more slowly than previously expected, the tailwind from declining interest rates will be modest compared to historical easing cycles.

Historical Context

A 12% return would be strong by historical standards. Since 1926, the S&P 500 has averaged roughly 10% annual returns including dividends. Delivering 12% for a fourth consecutive year would extend an impressive run:

  • 2023: 26.3% total return
  • 2024: 25% total return
  • 2025: 18% total return
  • 2026 (projected): 12% total return

Four consecutive years of double-digit returns is rare but not unprecedented. The pattern suggests a maturing bull market that, while slowing, hasn't ended.

January as Indicator

January's performance has historically provided some signal for full-year returns. Through late January 2026, the S&P 500 was up approximately 2-3%, a positive start that historical data suggests bodes well for the year.

Data from the past 30 years shows a moderate correlation between January performance and annual returns. When January is positive, the full year has historically been positive about 74% of the time. When January gains exceed 5%, annual returns have averaged particularly strong.

Key Risks to the Forecast

Goldman identifies several factors that could derail the 12% forecast:

Downside Risks

  • Economic slowdown: Weaker-than-expected growth would hurt earnings
  • Hawkish Fed surprise: If inflation proves stickier than expected, the Fed might not cut as anticipated
  • Geopolitical escalation: Major conflicts could trigger risk-off behavior
  • AI disappointment: If AI-related revenue growth falters, tech stocks could correct

Upside Risks

  • Productivity boom: If AI drives faster productivity growth than expected, earnings could surprise to the upside
  • Multiple expansion: Strong earnings could convince investors to pay even higher multiples
  • Rate cuts accelerate: Faster Fed easing would boost asset prices

Sector Implications

Goldman's forecast has implications for sector positioning:

Favored Sectors

  • Technology: Despite concentration concerns, AI beneficiaries should continue outperforming
  • Healthcare: Defensive characteristics plus GLP-1 drug growth provide appeal
  • Industrials: Infrastructure spending and reshoring trends support earnings

Less Favored Sectors

  • Utilities: Rate-sensitive sectors may lag in a gradual cutting environment
  • Consumer discretionary: Softening consumer confidence creates headwinds
  • Real estate: Higher-for-longer rates pressure property values

What It Means for Investors

Goldman's forecast suggests several practical implications:

Stay Invested

A projected 12% return still exceeds expected bond yields and inflation. Maintaining equity exposure makes sense for investors with appropriate time horizons.

Manage Expectations

After three years of outsized gains, a 12% return might feel disappointing. Setting realistic expectations helps maintain discipline during inevitable volatility.

Focus on Quality

In a market driven by earnings rather than multiple expansion, companies that actually grow profits will outperform. Quality factors—strong balance sheets, consistent margins, competitive moats—become more important.

Diversify

With tech concentration high and valuations stretched, diversification across sectors and geographies provides protection against single-factor risk.

The Bottom Line

Goldman Sachs' 12% return forecast represents a vote of confidence in the continued bull market, tempered by recognition that easy gains are behind us. The transition from multiple expansion to earnings-driven returns marks a new phase—one where company fundamentals matter more than momentum.

For investors, this environment rewards patience, selectivity, and attention to valuations. The bull market isn't over, but it's maturing. Success in 2026 will likely come from owning the right stocks rather than simply owning stocks.