Goldman Sachs Cuts Earnings Growth Outlook, Sees Investors Move From 'Excitement' To 'Boredom'

David Kostin, the Chief U.S. Equity Strategist of Goldman Sachs, has revised his earnings growth forecast, citing a weaker economic outlook, and highlighted a shift in market trends.

What Happened: On CNBC’s ‘Squawk on the Street’, Kostin discussed his revised earnings growth forecast and market trends. Initially projected at 11%, the earnings growth forecast for 2025 has now been adjusted to 9%.

Despite this, Kostin maintains that the earnings growth for 2026 remains at 7%, unchanged. He also stated that the S&P 500 year-end target remains at 6500, suggesting an 11% gain from current levels.

Kostin also noted a shift in investment strategy, with investors moving from “excitement” (cyclicals) to “boredom” (defensive stocks) amid tariff uncertainties. He identified healthcare and consumer staples as preferred sectors for their stability and less sensitivity to the ongoing trade war. He also named Thermo Fisher TMO and Agilent Technologies A as strong investment options.

Furthermore, he notes a shift in focus from AI infrastructure and hyperscalers to software companies that would be leveraging AI to amplify their revenues, for instance, MongoDB MDB.

According to Kostin, uncertainty around tariffs makes forecasting difficult, but models suggest earnings will be impacted through unit volumes and margins. The strategist estimated that a 5% increase in tariffs could reduce earnings growth by 1-2%.

Why It Matters: This shift in investment strategy is noteworthy, considering that institutional investors were bullish on technology and financials during the fourth quarter of 2024. Investors were seen pulling back from the healthcare sector, which Kostin now identifies as a preferred sector. Even Warren Buffet‘s Berkshire Hathaway trimmed its stake in healthcare provider DaVita Inc. DVA, bringing down the ownership to 45%.

These market shifts and Kostin’s revised forecast underline the uncertainties in the current economic climate but also highlight potential opportunities in defensive sectors and AI-driven businesses. That being said, Kostin expects the falling bond yields to offset some tariff effects, potentially benefiting the economy. He summed up by saying that GDP growth is the primary driver of earnings, with interest rates and inflation playing secondary roles.

The S&P 500 SPY climbed 1.12% to close at 5,842.63 on Wednesday after President Donald Trump pushed back auto tariffs on Canada and Mexico by one month.