To The Moon

$S&P 500(.SPX)$ ROE hit a record high of 22%, but the capital expenditure boom of AI giants will systematically drag down the earnings quality of the seven major tech stocks in the coming years.

Market Snapshot

• $SPDR S&P 500 ETF Trust(SPY)$ : 📈 Closed up 754.83 (+1.8%, previous close 741.75) [Data as of 06/16 05:05 EDT] | Pre-Market: $754.56 (-0.04%)

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S&P 500 ROE hits record high, but structural concerns emerge

The current S&P 500 rolling fourth-quarter ROE is 22%, the highest level in history, with EBIT margin expansion being the core driver.

Over the past four decades, declining tax rates (from approximately 40% to the current approximately 20%) have contributed the largest share to the increase in ROE, while the current corporate profit as a percentage of GDP has risen to its highest level since 1950, and the tail risk of future policy tightening cannot be ignored.

$Goldman Sachs(GS)$ ' macro model shows that for every 1 percentage point change in the S&P 500 ROE, the corresponding market P/E changes by approximately 1x. The current NTM P/E of 21x is largely in line with the macro fair value.

AI Capital Expenditure Surge: The Primary Pressure on Hyperscale Cloud Vendors' ROE

Consensus forecasts indicate that hyperscale cloud vendors ( $Amazon.com(AMZN)$ , $Alphabet(GOOG)$ , $Meta Platforms, Inc.(META)$ , $NVIDIA(NVDA)$ , $Apple(AAPL)$ , $Broadcom(AVGO)$ ) will have capital expenditures of 770 billion euros in 2026, equivalent to 100% of their operating cash flow.

To fill the funding gap, these companies have turned to debt and equity financing and reduced share buybacks. Hyperscale cloud vendors' net debt has increased by 170 billion euros since the beginning of 2025, and their outstanding share capital has also begun to expand.

The continued decline in asset turnover coupled with rising depreciation expenses is expected to cause the average ROE of the seven major technology stocks to fall by 700 basis points next year—AAPL will see the largest drop (-26pp), followed by NVDA (-12pp), while only AVGO will remain essentially flat (0pp).

Semiconductor Sector: Record Profit Margins, but ROE Turning Point Approaching

The semiconductor sector's rolling 12-month net profit margin has risen to a historical high of 41% (consensus forecast of 49% for 2027), with strong pricing power and tight supply and demand being the core supports.

However, analysts predict that while profit margins may hold, the rate of equity expansion will outpace profit growth, leading to downward pressure on the sector's ROE.

This week, semiconductor stocks led the market: $KLA-Tencor(KLAC)$ rose +32%, $Intel(INTC)$ +26%, $Applied Materials(AMAT)$ +25%, and $Lam Research(LRCX)$ +21%, while the Software & Services sector plummeted -9.3% this week, making it the weakest sector in the market.

Upside Scenario for Long-Term AI Returns: Can the Productivity Dividend Be Realized?

For the S&P 500 as a whole, improved AI productivity represents a potential upside scenario for ROE—higher asset turnover and sales/employee ratios will gradually boost the profitability of non-technology sectors. However, the implementation of AI in enterprises is still in its early stages: last quarter, approximately 54% of companies mentioned AI productivity in their earnings calls, only 11% provided specific use case data, and only 2% quantified the actual impact on profitability.

Goldman Sachs also points out that how much of the economic benefits related to AI ultimately accrues to enterprises will depend on the direction of tax policy, and with corporate profits as a percentage of GDP already at their highest level since 1950, the risk of policy backlash warrants attention.

S&P 500 Target Price and EPS Forecast

Goldman Sachs maintains its year-end 2026 S&P 500 target price of $8000 (up 8% from the current $7394), and its 12-month target price of $8300 (up 12%). EPS Forecasts: $275 in 2025 (YoY +12%), $340 in 2026 (YoY +24%), and $385 in 2027 (YoY +13%).

The information technology sector will contribute the largest share of EPS growth in 2026 (+56% YoY), followed by the energy sector (+60% YoY, but with a significant base effect). This week's biggest winners were in semiconductor equipment, while the biggest losers were in software services, with ADBE down 19% and SMCI down 27% for the week.

GSTHGROE Rebalancing: Goldman Sachs rebalanced its GSTHGROE portfolio in this report, incorporating 50 stocks with the highest consensus ROE growth over the next 12 months. This portfolio has a median forward ROE of 18% and an ROE growth rate of 18%, compared to the S&P 500 median ROE of 18% and a growth rate of 0%. Its valuation is also similar to the S&P 500 median (median price-to-book ratio of 3.3x).

New additions (in bold) include $Paramount Skydance Corp(PSKY)$ , $DoorDash, Inc.(DASH)$ , $Nike(NKE)$ , $LyondellBasell Industries NV(LYB)$ , and $CoStar(CSGP)$ , spanning the communication services, consumer discretionary, materials, and real estate sectors.

This is for community discussion only and does not constitute investment advice.