From Assets to Alpha: David Kostin on US Equities

2026 U.S. Equity Forecast:

• Goldman Sachs Chief U.S. Equity Strategist David Koston forecasts a 20%+ return for U.S. stocks in 2026, departing from typical consensus forecasts of 8–12%.
• This optimistic outlook rests on three pillars: economic stability, earnings growth, and valuation dynamics.

Market Sentiment and Volatility (2025 Context):

• Sentiment began the year optimistically but shifted following "Liberation Day" (April 2), which triggered dramatic volatility.
• Volatility has since receded, with the market showing a monotonic increase from April lows until recent data release pauses.
• The VIX is trading near 19, slightly below the recent average, suggesting a stabilizing setup for 2026.

Earnings and AI Valuation Analysis:

• Third-quarter earnings growth accelerated by nearly 9% year-over-year, driven by both the "Magnificent Seven" and a broad array of companies, acting as a market stabilizer.
• Public Market AI Assessment: Koston argues the public market is not in a bubble, citing that NVIDIA's share price and earnings have both increased 12-fold over three years, aligning valuation with fundamental growth.
• Valuation Comparisons: The top 10 S&P 500 companies currently trade at roughly 30x earnings, a significant decrease from 40x in 2021 and 50x in 1999.
• IPO Market Data: 55 IPOs raised over $25 million in 2025, contrasting sharply with 280 deals in 2021 and nearly 400 in 1999, indicating muted capital availability in the public sector.

Private Market AI Concerns and Reflexivity:

• Koston identifies a potential bubble in private markets regarding AI, driven by capital availability rather than price-to-earnings ratios.
• He applies George Soros's theory of "reflexivity" (from The Alchemy of Finance), describing a recursive loop where increased capital inflows drive growth, which in turn drives valuation, creating a cycle dependent on continuous funding.
• This dynamic diverges from public markets, where vendor financing and sustainable growth are more constrained, leading to potential corrections if growth cannot be sustained.

Long-Term Return Outlook (10-Year Horizon):

• The Goldman Sachs portfolio strategy team projects S&P 500 annualized returns between 3% and 10% over the next decade, with a midpoint of 6.5%.
• Koston believes returns will likely land on the lower end of this distribution due to:
  • High starting valuations (S&P 500 trading at ~23x forward earnings, near 1999 levels).
  • Record-high profit margins, which may contract over time.
  • Extreme market concentration in large-cap stocks, which historically introduces higher volatility without commensurate compensation.

Investor Behavior and Fund Performance:

• Only 29% of mutual funds outperformed their style benchmarks in 2025, significantly below the typical 37%.
• Hedge funds returned ~12% year-to-date, lagging the S&P 500's ~17% gain.
• Underperformance is attributed to funds failing to increase gross exposure during the April rally, missing the recovery driven by the AI trade.

Current Investment Opportunities:

• Healthcare: Identified as the statistically cheapest sector in 30 years on a relative basis; potential for value-driven gains if healthcare policy uncertainty recedes.
• Consumer/Retail: Focus on the middle-income cohort, which shows stability and growth, expected to benefit from upcoming tax reforms despite concerns regarding lower-income demographics.
• AI Revenue Drivers: Shift in focus from cost-reduction to companies using AI to drive concrete revenue growth, a niche where fund managers are expected to find new alpha.

Portfolio Allocation Trends:

• The largest stocks comprise roughly one-third of the S&P 500; avoiding them requires taking on significant concentration risk.
• Mutual funds remain underweight these top stocks due to SEC diversification rules, while hedge funds maintain heavy exposure to AI beneficiaries.
• Concerns regarding product commoditization and future pricing power remain, but investor ownership persists as long as earnings growth continues.

Career Reflections and Market Evolution:

• Market Shift (Assets to Alpha): Koston notes a major industry evolution from valuing assets to trading "alpha" (individual company characteristics), a trend accelerated since 2006.
• Strategic Framework: The core analytical framework (Economy, Earnings, Valuation, Money Flow) has remained consistent since his hiring in 1994 under Steve Einhorn.
• Personal Milestones: Koston joined Goldman Sachs on September 12, 1994; that same day, senior partner Steve Friedman retired, and the firm faced a difficult year of Fed rate hikes and layoffs.
• Notable Client Interactions: Highlighted dialogues with Warren Buffett (memorable for his 1991/2015 memory retention), Paul Tudor Jones (macro-integrated thinking), Jim Parsons (tactical stock analysis), and Don O'Neill (long-horizon strategy).

Strategic Transition:

• David Koston is retiring as Chief U.S. Equity Strategist; Ben Snyder is his successor after 15 years of collaboration.
• Koston will transition to an Advisory Director role in 2026, interacting with clients and internal teams.
• He advises new hires to understand their role within the broader commercial process and to recognize the diverse risk tolerances of clients ranging from sovereign wealth funds to hedge funds.

Disclaimer and Context:

• Transcript recorded December 2, 2025, by Allison Nathan.
• Views expressed are as of the date of publication and subject to change.
• The material is for informational purposes only and does not constitute investment advice.