Investing.com -- A flood of new U.S. stock supply is likely to pressure valuations in 2027 but is not expected to derail the bull market, Goldman Sachs strategists say, as strong corporate and investor demand helps absorb it.

The team led by Ben Snider said 2026 is on track for record equity issuance. U.S. companies have raised $431 billion this year through IPOs, follow-ons, convertibles and SPACs, up 98% from a year earlier. The total will likely pass the prior high of $540 billion set in 2021, though the number of deals and issuance relative to market value are close to historical averages.

Activity has slowed since a record second quarter. Companies raised $93 billion in the third quarter, down from $252 billion in the second quarter, when half of the dollar volume came from two deals. The monthly number of offerings fell to about 50 on average from more than 90 in May and June.

Goldman linked the slowdown to a sharp rise in interest rates. The 10-year Treasury yield has risen about 125 basis points over the past year and more than 50 basis points since late August, moves of roughly two standard deviations. "Macro volatility, including the sharp recent increase in interest rates, has contributed to the slowdown in equity issuance," the strategists wrote.

Narrow market breadth has also hurt, with the median S&P 500 stock 16% below its high. "The strength of the S&P 500 has kept the Barometer at elevated levels. However, the median S&P 500 stock currently trades 16% below its respective high, pushing market breadth to its lowest level since the Dot-Com Bubble," they noted. "Incorporating this narrowness into the Barometer indicates IPO conditions that have recently softened and now rank slightly below the historical average."

For 2027, Goldman forecasts $600 billion of equity issuance, including $175 billion of IPOs, equal to 0.8% of U.S. equity market value, in line with the 10-year average. The bank expects solid growth, rising stock prices, lower interest rates and AI investment to drive it.

Equity is playing a supporting role in funding the AI boom. AI-related follow-on offerings have totaled $65 billion this year, or 45% of follow-on volume, compared with roughly $600 billion of AI-related debt issuance.

Demand, the strategists argue, should offset much of the supply. S&P 500 buybacks rose 15% in the first half, and Goldman expects gross buybacks of about $1.7 trillion in 2027, up from $1.5 trillion this year. With cash M&A, corporate equity demand should exceed $2 trillion. Households and foreign investors bought more than $1 trillion of stocks in the first half.

Including expiring lockups, net public equity supply will likely rise next year by the most since 2000. But Goldman said it is unrealistic to assume all unlocked shares will be sold immediately. "The shifting balance of corporate supply and demand adds pressure on equity valuations," the strategists said, "but we do not expect increasing equity supply to derail the bull market."

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