A (2:34)

Right. But this disruption risk, it's been on investors minds for some time now. So why now for these moves?

B (2:41)

That's right. We've been discussing this with investors for many years and you know, we've identified a couple of proximate risks that we think are really key. Google released its Genie 3 model which had some tools around gaming. So you saw some selling pressure among the gaming and advertising stocks following the launch there. You then had Claude's cowork tool that had a bunch of plugins related to some of these services industries that led to the selling pressure you saw in legal services and some of those other industries. And even as of the last day or two, you've seen insurance companies release products that can compare insurance quotes. And so you've seen selling pressure in insurance companies. And so to us it seems like you're starting to see more industry specific applications be rolled out from some of these large language models. And that is really leading to investors questioning the long term sustainability of some of these business models. Now you know, if you think about it from an equity investor perspective, an equity is a discounted stream of future cash flows. And the debate that investors are having right now is what kind of value do you assign to that terminal value, that long term terminal value for a company.

A (3:45)

Right. And our answer is we, we don't know at this point. Right. A lot has to happen for us to understand how that's going to evolve.

B (3:51)

Yeah, These tools have just been rolled out still early in the timeline for adoption of those tools, their efficacy. All of these types of questions have to be resolved. But it seems to us like investors are saying these stocks traded at high valuations and have been popular for a long time. Let's reposition our portfolios first and then start to work through some of the questions later.

A (4:11)

And let's take a step back for a moment, Ryan, because you've done a lot of research on historical episodes around disruption. So what did you learn from that type of research that could be applicable to how we think about today?

B (4:24)

Yeah, well, we're trying to help investors think through when is the right time to buy these stocks or you know, where is maybe the selling pressure overdone. And so we did look historically to try to find periods where you had analogs of disruption risk in markets. The two that we identified were newspapers in the 2000s alongside the rise of the Internet and then tobacco in the 1990s related to legislation more than technological disruption, but still kind of a relevant analog in both of those situations we found two common threads. Large price declines in many cases over multiple years rather than the span of a couple of days. But in terms of the forward path, it was really earnings that held the key. The prices of those industries bottomed more closely to periods when earnings started to stabilize. You saw it downward revisions to earnings in both of those episodes. And only when you saw earnings estimates start to stabilize did you see prices start to recover. I think you can tell a similar story today if you talk to our equity analysts. They similarly feel like earnings are a very important driver of the software space in the near term. We've seen it in the last couple of days, software stocks have actually rebounded a little bit and there have been a couple of earnings announcements from these companies that have been better than feared and supported some of the price action. And so, you know, this is a broader view from our team that earnings are really key to this market in general. But I think that's also true for the disruption risk. Now the hard part is this may not be resolved in one or two quarters. This is a multi year debate that I think investors will be having. But I think signs in earnings seasons that the fundamentals are still strong I think would help assuage some investors.

A (6:01)

Right. I mean, just to be perfectly clear, as long as these companies are still delivering on earnings and growing, then investors are going to be able to have more confidence again in them. So that's what we're watching closely over the next several quarters.

B (6:15)

I think that's right. I think the hard part is just the long term earnings outlook may be under more pressure. Right? That could be true for the next couple of quarters. It's really the tension between good near term fundamentals and what kind of long term fundamentals you can assume for these companies. In part because for equities, that long term value is really where a lot of the value of the equity is understood.

A (6:35)

If we zoom out a little bit to the broader AI trade and theme that's been so dominant in the markets the last couple of years, it's a little bit confusing because some of the big AI centric stocks haven't been rallying this year. And so that kind of suggests that this isn't just about investors deciding AI is going to have a bigger impact than we all expected. So when we look at the performance of these AI centric stocks, what's driving that in the recent period, Yeah, I.

B (7:01)

Think after a couple of years of AI being the growth engine for S&P 500 returns, broader markets to us, the trade just looks a lot more complicated in 2026. I think one thing that is for certain is companies are spending a lot on CapEx to fuel the AI buildout. So you know, to put some numbers that, the five large public US hyperscalers spent about $400 billion on capex last year. the start of this year, analysts were expecting them to spend about $540 billion on capex in 2026, a further increase in spending large dollar amounts. But a slowing growth rate following earnings season where you had a couple of these companies announce big upside surprises to their capex numbers. That estimate is up to 660 billion. So you've added $120 billion of incremental capex expectations in the span of a couple of weeks. The growth rate is now 60% in 2026 rather than 35% at the start of the year. Based on analyst expectations, our view is there's probably room for those numbers to keep going up. These companies continue to message that they plan to invest. They have very strong balance sheets and cash flow generation and there are many supply constraints out there that is constraining some of that spending. But I think point number one is a lot of spending is happening. The hard part is the stock price reactions to those announcements was very disparate. Right? You saw all of these companies saw their capex numbers go up, but you saw some stocks go up 10%, some stocks go down 10% and some stocks basically stay flat on the day of the announcements.

A (8:34)

So why is that?

B (8:35)

To us, that's because investors are taking a closer look at monetization of AI and the fundamentals of the underlying business. So, you know, if a company was able to message to investors that they are monetizing AI, that could be through their cloud business, that could be through their ad business, then those stocks responded favorably because investors have confidence in the return on that investment. If you saw some pressure in those estimates for those businesses or their sales or earnings, then you saw those companies come down. And so to us it looks like the group is just going to be have a lot more dispersion within the group. No longer is it going to be one big group of stocks powering the index higher. You will see periods where some stocks are doing better or worse than others. And again, for us, it's really, how is CapEx translating into revenues and earnings for these companies? I Think that will determine which stocks are benefiting from this the most.

A (9:28)

And is there an aspect as well in terms of how is that capex being funded? Because we are hearing reports that more and more is coming through leverage and debt.

B (9:38)

Yeah, I think the good news is for a long time these companies were cash flow rich companies that were generating very strong cash flows in their underlying businesses that could afford to spend on this CapEx related to the AI buildout. As we get to 2026 and these numbers have come up a lot, I think that story is coming under a little bit of pressure. If you look at 2026 estimates based on the level of CapEx and cash flows that analysts are forecasting through these companies, it's expected to reach about 90% of their cash flows from operations that they're generating. They still have cash on the balance sheet, but you're getting to territory where it's exhausting a lot of their cash flows from their underlying businesses. And so you have seen headlines of more debt issuance. You know, they pulled back on some of their other uses of cash like buybacks. And this will be a theme going forward. I think the good news for markets as a whole is corporate and consumer balance sheets remain very strong. Even these companies have very, very strong balance sheets. Effectively no leverage on their balance sheets to start with a few exceptions among the group. But yeah, I think how you're monetizing it, how you're funding it, all of that will lead to a lot of dispersion at the top of the index.

A (10:43)

So if we think about the rally broadly in like cyclical stocks, that's also occurring amid all of this. Is there just sort of a rotation going on? How do you explain the overall performance of the S&P 500amid all of this volatility?

B (10:58)

Yeah, I think the hard part is the sell off in some of the software names and disruption. Risk comes at a time when investors were already looking to own other parts of the market besides those leading companies that have done well for so many years. So we would say the defining word of the 2026 market so far has been broadening. You can see that in the outperformance of non US equities versus US equities. Small caps doing better than large caps for the first time in a while and cyclicals doing better than defensives. And our view is there's a good macro reason for that broadening. Economists here at Goldman are forecasting that economic growth will accelerate in the first part of 2026 as you get a fading headwind from tariffs, building tailwinds from financial conditions and fiscal policy. All of that will lead to above trend above consensus, accelerating economic growth. And that is good for cyclical parts of the market that for a long time have not really been the ones driving markets higher. And so pockets of the market, like consumer discretionary companies or transports or some of the industrial complex, those stocks are really driving markets higher. And we think there's probably room for that to continue if the macro environment continues to be friendly. So you have kind of this confluence of factors happening at the same time that lead to some of these rotations under the hood of the index.

A (12:19)

So putting this all together, what does this really tell us about the US Bull market? Can it last? I mean, you think it can, yeah.

B (12:26)

So if you look at Our S&P 500 index level forecast, we do have further upside to the index from here. But the magnitude of returns relative to the past couple of years is starting to get smaller. The underpinning for our forecast is earnings, right? Valuations are very high relative to history. We think those are mostly supported by the macro and fundamental outlook for these companies. But we think multiples will stay roughly flat around current levels and instead earnings will be the thing driving markets higher. And so the good news is, as we leave fourth quarter earnings season, we feel very confident in the earnings outlook for large cap U.S. companies. You know, if you look at fourth quarter earnings, they're on track to grow by about 12%. You've had four consecutive quarters of double digit earnings growth for the index. Even if you take out the largest companies, the median company is growing earnings by about 9% in the fourth quarter. So very healthy earnings growth for most companies in the index, even outside of the AI trade, should give you a very strong underpinning for continued equity market upside. But high multiples, high concentration, all of that means the starting point is one where the bar is a little bit higher for big gains to the equity market. And so we do think you'll see further upside, but at a slowing pace relative to the past couple of years. And I think this rotation and dispersion at the top of the index I think is one reason to believe that's probably going to continue. You can have companies come into the top of the index that are not there today. Companies may drop out, but the dynamism of The S&P 500 we think should continue to lead to some modest upside from here.

A (13:56)

Thanks for joining us, Ryan, and providing some insight into some of these very big moves. Thanks for having me and thank you for listening to this episode of Goldman Sachs Exchanges which was recorded on Wednesday, February 11, 2026. I'm Allison Nathan.

C (14:12)

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