As mid-July approaches, the U.S. equity market’s second-quarter earnings season has gradually begun.
Buoyed by investor confidence in the AI-driven technology theme, all three major U.S. equity indices posted significant gains in the second quarter of this year, repeatedly reaching record highs. $Nasdaq Composite Index (.IXIC.US)$ rising more than 21% for the quarter, $S&P 500 Index (.SPX.US)$ gaining nearly 15%, $Dow Jones Industrial Average (.DJI.US)$ and climbing close to 12%. However, as June progressed, volatility in the three major U.S. indices intensified; technology sectors such as memory chips continued to face downward pressure in July, heightening market concerns about the overall volatility of tech stocks.
Meanwhile, geopolitical tensions and unpredictable shifts in monetary policy are testing investors’ confidence and patience in the AI-driven tech theme, making the ongoing Q2 earnings season a critical test for validating market direction.
According to Goldman Sachs, the U.S. equity market is poised for another strong earnings season. Goldman Sachs forecasts that S&P 500 constituents will report year-over-year earnings growth of 22% in the second quarter, with AI infrastructure-related stocks accounting for nearly 60% of this growth, including $Micron Technology (MU.US)$ and $NVIDIA (NVDA.US)$ two companies alone contributing over 40%. If realized, this would mark the second consecutive quarter in which the S&P 500 achieves earnings growth exceeding 20%.
However, with U.S. equity valuations remaining elevated, the earnings season could turn into a true “double-edged massacre”—where beating earnings expectations no longer guarantees share price gains, and even minor disappointments may trigger severe sell-offs. Market tolerance for earnings shortfalls has reached a historic low. Notably, the focus this quarter is no longer merely on “beating expectations,” but whether strong results and forward guidance can effectively translate into upward momentum for stock prices. Investors will pay closer attention to companies’ commentary on future orders and guidance for the next quarter.
The AI rally may continue—but can robust earnings sustain stock prices?
A Goldman Sachs report explicitly identified the AI investment boom as the dominant theme of this earnings season. Strategists wrote that Q2 earnings 'will once again confirm strong profit growth, supported by solid macroeconomic fundamentals and sustained enthusiasm for AI investments.' Data shows that in the U.S., profits for information technology companies are expected to surge by nearly 60% in Q2, ranking second among S&P 500 sectors—trailing only the energy sector’s 122% gain.
Major buyers of AI infrastructure— $Alphabet-A (GOOGL.US)$ / $Alphabet-C (GOOG.US)$ 、 $Amazon (AMZN.US)$ 、 $Meta Platforms (META.US)$ and $Microsoft (MSFT.US)$ Earnings reports will be released in late July, with market attention focused on two key issues: the sustainability and scalability of AI investment returns, and forward-looking guidance from companies on future capital expenditures. Google and Amazon have already begun showing early signs of returns on their capital spending in the previous quarter.
The Goldman Sachs report emphasized that the market’s primary focus is no longer on the performance of tech giants themselves—after all, the AI-related spending by hyperscale cloud providers is already evident—but rather on whether a broader set of companies across the supply chain can translate AI-driven demand into tangible profitability. Hyperscale cloud providers such as Microsoft, Amazon, Google, and Meta Platforms are investing in AI infrastructure at a pace exceeding their own operating cash flows. Whether this unprecedented wave of capital expenditure will yield sufficient returns has become the market’s most critical unresolved question.
Optimists view these investments as key 'options' purchased in anticipation of explosive growth in future AI agents, enterprise tools, and new applications; they believe returns will eventually materialize as costs decline and adoption scales. Pessimists, however, worry that lagging near-term returns, potential oversupply, rising pricing pressures, and the emergence of cheaper alternatives globally could severely challenge the timely realization of enterprise monetization—fueling market concerns about valuation bubbles and concentrated positioning risks.
Against this backdrop, the Q2 earnings season serves as a crucial near-term test of whether there will be substantive progress along the 'path to AI investment returns.'
It is also worth noting that the market has grown increasingly demanding. U.S. tech stocks appear caught in a dilemma for investors: strong earnings fail to lift share prices, while disappointing results trigger sharp sell-offs. The market is no longer satisfied with 'good' performance—it now demands 'consistently exceeding expectations,' a challenge all AI-related tech stocks are about to face collectively.
Previously, $Taiwan Semiconductor (TSM.US)$ Yesterday’s Q2 results significantly surpassed expectations, yet the stock price fell by more than 2%, illustrating the classic market behavior of 'buy the rumor, sell the fact.' $ASML Holding (ASML.US)$ On Wednesday, the company reported better-than-expected earnings and raised its guidance, but shares rose by just over 2% on the day following the announcement. Meanwhile, $IBM Corp (IBM.US)$ another company saw its stock plunge by more than 20% in a single day after issuing a profit warning.
Market analysts attribute this primarily to two factors: first, investor concerns over lofty AI valuations and the returns on massive expenditures have raised earnings expectations to such high levels that fundamentals have become severely disconnected from stock prices; second, the market is undergoing systemic deleveraging and the unwinding of momentum trades, meaning price movements are now driven less by fundamentals and more by positioning structures. Current price dynamics may therefore be shaped less by fundamentals and more by portfolio positioning and factor rotations—which also implies that earnings expectations for the hardware sector have been set extremely high.
Investors are now placing greater emphasis on earnings quality, forward guidance, and whether current valuations are sufficiently justified by fundamentals. The market is closely watching whether the ever-expanding capital expenditures by tech giants will ultimately generate adequate returns. Companies must simultaneously demonstrate resilient profit margins, unchanged or improved full-year guidance, and evidence that earnings growth is broadening beyond a handful of AI and tech leaders to encompass a wider range of industries before the market is willing to assign higher valuations.
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