The latest U.S. earnings season is delivering stronger-than-expected profit growth, potentially giving the S&P 500 enough fundamental support to withstand continued turbulence across artificial intelligence stocks, according to Goldman Sachs.
Rather than viewing the recent AI sell-off as evidence that the investment cycle has ended, the bank believes the correction resembles the consolidation phases that have historically followed exceptionally strong momentum rallies.
Goldman Sees Familiar Pattern Behind AI Correction
“AI stock volatility during the past week has continued to follow the typical historical pattern following sharp Momentum rallies,” strategists led by Ben Snider said.
Periods of unusually powerful momentum have historically been followed by temporary drawdowns as investors take profits and reduce leverage.
Goldman believes recent deleveraging, together with historical precedent, “suggest an improved outlook going forward,” although earnings performance will ultimately determine whether AI stocks can resume their advance.
S&P 500 Companies Deliver Strong Profit Growth
With 61% of the index having reported by July 31, approximately 64% of S&P 500 companies had exceeded consensus EPS forecasts by at least one standard deviation.
Underlying earnings growth is running at roughly 26% year-over-year after stripping out “other income” generated by appreciating equity investments at mega-cap technology companies. Including those gains increases headline EPS growth to 45%.
Meanwhile, the median S&P 500 company is delivering approximately 12% earnings growth, exceeding the 9% anticipated before reporting season began.
AI infrastructure companies are responsible for roughly one-third of the increase.
Strong Results No Longer Guarantee Technology Stock Gains
Investors have nevertheless responded cautiously to positive technology results.
Goldman observed that “the reaction to earnings beats has been lackluster for Technology, Media, and Telecommunications (TMT) stocks,” despite the fact that “the equal-weight S&P 500 has continued to climb alongside steady EPS growth.”
Technology, media and telecommunications companies beating expectations subsequently underperformed the benchmark by a median 192 basis points, while earnings winners elsewhere generated 75 basis points of median outperformance.
The figures suggest expectations surrounding AI-related companies have become sufficiently elevated that simply beating forecasts may no longer be enough to drive shares higher.
AI Capital Spending Heads Towards $1 Trillion
Investment in artificial intelligence infrastructure continues to accelerate despite market concerns.
Hyperscalers collectively spent $182 billion on capital expenditure during the quarter while producing only $5 billion of free cash flow and raising $101 billion through debt and equity markets.
Goldman said the results “signaled rising capex spending and increasing need for external financing but also growing evidence of return on AI investments.”
Analysts now anticipate AI-related capital expenditure exceeding $1 trillion in 2027, more than $100 billion above previous projections.
Cloud revenue growth reaching 48% during the quarter provides an important counterargument to concerns about excessive investment, suggesting demand continues to expand alongside spending.
Broader Earnings Growth Strengthens Market Foundations
Perhaps the most encouraging development for the wider market is that earnings strength is becoming less dependent on technology companies.
The continued advance of the equal-weight S&P 500, alongside positive earnings revisions across most industries, suggests corporate profitability remains healthy across a broader portion of the economy.
Goldman nevertheless cautions that “the impact of rising input costs on margins remains a key risk.”
While AI stocks could therefore remain volatile, robust earnings growth across the wider S&P 500 may provide enough fundamental support to prevent turbulence in technology shares from developing into a broader market downturn.
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