① Goldman Sachs believes that recent volatility in AI-related stocks does not signal the onset of a broader market collapse, as market fundamentals remain healthier than price movements suggest; ② The firm expects AI-related trades to continue experiencing significant rotation and volatility. However, unless corporate earnings begin to deteriorate, the overall bull market will remain grounded in profit growth rather than mere speculation.
Ben Snider, Chief U.S. Equity Strategist at Goldman Sachs Research, stated in his latest commentary that investors should not mistake the recent volatility in artificial intelligence (AI) stocks for the beginning of a broader market crash.
He noted that although momentum-driven technology stocks have experienced sharp swings, corporate earnings remain exceptionally strong, with upward revisions to earnings expectations and growing evidence that large-scale AI investments are starting to yield returns. According to Goldman Sachs, the key question for investors has shifted from whether AI spending is excessive to whether earnings can continue to support such spending.
Goldman Sachs stated that the recent sell-off in AI-related equities has followed an unexpected yet familiar pattern. In a recent report, Snider wrote that although the pullback arrived abruptly, the magnitude of the volatility resembles historical episodes when momentum investing became overly concentrated. Historically, such periods have often been followed by a consolidation phase before markets resume their long-term trend.
Goldman Sachs also pointed out that hedge funds and exchange-traded fund (ETF) investors have significantly reduced leverage, a move the firm believes should help mitigate recent market volatility.
Overall, Goldman Sachs maintains that market fundamentals remain considerably healthier than recent price action suggests. The firm’s overarching conclusion is that AI-related trades will likely continue to experience pronounced rotation and volatility. However, unless earnings start to deteriorate, the broader bull market will remain anchored in corporate profit growth rather than speculation alone.
Earnings Are the Primary Driver
Goldman Sachs noted that second-quarter earnings reports have largely fueled market enthusiasm. As of July 31, roughly two-thirds of the companies comprising the S&P 500 by market capitalization had reported Q2 results. Goldman Sachs found that 64% of these firms delivered earnings that exceeded Wall Street expectations by at least one standard deviation, making it one of the strongest earnings seasons on record.
The firm estimates that, excluding unusually large investment gains reported by a few major tech companies, earnings for S&P 500 constituents grew by 26% year-over-year. Including those gains, core earnings growth would reach 45%.
Even companies with middling performance surpassed expectations. Goldman Sachs estimates that earnings for S&P 500 constituents grew by 12%, higher than the 9% initially forecast by analysts at the start of the quarter.
Artificial intelligence still accounts for the lion's share.
Snider noted that artificial intelligence infrastructure companies continue to capture a significant portion of corporate profit growth.
Goldman Sachs estimates that AI infrastructure companies contributed roughly one-third of the S&P 500’s earnings growth in the second quarter, and this share could exceed half for the remainder of 2026 and into 2027. Alphabet, Amazon, Microsoft, NVIDIA, and Broadcom remain the largest contributors.
Meanwhile, Goldman Sachs notes that strong earnings are not limited solely to AI winners: as earnings expectations steadily rise, the equal-weighted S&P 500 index—excluding the influence of mega-cap tech giants—has continued to climb, indicating that broader corporate fundamentals remain healthy.
Wall Street keeps raising its expectations.
Notably, robust quarterly earnings reports have also made analysts more optimistic about next year.
Goldman Sachs points out that since early in the third quarter, consensus market expectations for S&P 500 earnings in 2027 have been revised upward by approximately 1%, with most sectors seeing upward revisions. The energy and financial sectors experienced the largest upward adjustments.
However, the firm specifically cautioned investors to pay attention to profit margins.
“Companies have largely absorbed higher tariffs and energy costs, but analysts have started to lower margin expectations for many companies reporting results this quarter, suggesting that input costs remain a risk even as revenues stay healthy,” the report stated.
The wave of AI-related spending shows no signs of slowing down.
Perhaps the report’s most significant conclusion is that hyperscale cloud companies appear more willing than ever to continue investing capital.
Alphabet, Amazon, and Microsoft reported a 48% year-over-year increase in cloud revenue this quarter, up from 39% in the previous quarter. Meta’s revenue growth also met expectations. These results prompted analysts to raise their forecasts for future spending.
Goldman Sachs now estimates that capital expenditures by hyperscale data center operators will exceed $1 trillion by 2027, over $100 billion higher than expectations at the start of earnings season.
However, such massive spending does not come without cost. Data shows that the five major hyperscalers collectively spent $182 billion on capital expenditures in the second quarter, while generating only approximately $5 billion in free cash flow during the same period. To bridge this substantial gap, they raised around $101 billion this quarter through debt and equity financing combined.
Goldman Sachs argues that rather than viewing this fundraising as a warning sign, it reflects growing confidence that investments in artificial intelligence will generate sufficient revenue growth to support continued expansion. Analysts forecast that even as capital expenditures keep rising, cloud service providers’ revenue growth will accelerate over the next two years.