Strong second-quarter corporate earnings are helping support U.S. equities despite continued turbulence among artificial intelligence-related stocks, according to Goldman Sachs. The bank believes recent weakness in momentum-driven AI names resembles previous periods of consolidation rather than necessarily signalling the end of the investment theme.
AI Stocks Enter Consolidation After Powerful Rally
Goldman strategists led by Ben Snider said recent volatility has followed a familiar historical pattern after periods of exceptionally strong momentum.
“AI stock volatility during the past week has continued to follow the typical historical pattern following sharp Momentum rallies,” the strategists said.
Previous extreme momentum rallies have frequently been followed by corrections or periods of consolidation, resembling the recent pullback in AI-related shares.
While corporate earnings will ultimately determine whether the trade regains momentum, Goldman said historical evidence combined with recent reductions in investor leverage “suggest an improved outlook going forward.”
Earnings Beats Reach Historically Strong Levels
By July 31, around 61% of S&P 500 companies had released their quarterly results, with 64% beating consensus earnings-per-share expectations by at least one standard deviation, representing one of the strongest performances on record.
Excluding “other income” generated by gains on equity investments held by mega-cap technology companies, S&P 500 earnings are tracking approximately 26% higher year-over-year. Including those investment gains pushes headline EPS growth to 45%.
The median company in the index is meanwhile on course to deliver EPS growth of around 12%, comfortably exceeding the 9% consensus forecast heading into earnings season.
AI infrastructure companies account for approximately one-third of the overall earnings expansion.
Technology Stocks Receive Muted Response to Earnings Beats
Despite impressive corporate results, investors have not rewarded every earnings beat equally.
Goldman noted that “the reaction to earnings beats has been lackluster for Technology, Media, and Telecommunications (TMT) stocks,” while “the equal-weight S&P 500 has continued to climb alongside steady EPS growth.”
Within TMT, the median company beating earnings expectations underperformed the S&P 500 by 192 basis points during the session following its results. In comparison, companies outside the sector that exceeded expectations generated median outperformance of 75 basis points.
The divergence suggests investors have become considerably more demanding when evaluating highly valued technology and AI-related businesses.
Earnings Forecasts Continue to Move Higher
Strong second-quarter results are also feeding through into longer-term expectations.
Since the beginning of the third quarter, bottom-up consensus estimates for S&P 500 earnings in 2027 have increased by 1%, with analysts making positive revisions across most sectors.
Nevertheless, Goldman warned that “the impact of rising input costs on margins remains a key risk.”
AI Investment Spending Continues to Accelerate
The scale of spending behind artificial intelligence remains another important consideration for investors.
Goldman said hyperscaler results “signaled rising capex spending and increasing need for external financing but also growing evidence of return on AI investments.”
The group collectively recorded $182 billion of capital expenditure during the quarter, compared with only $5 billion in free cash flow, while debt and equity issuance reached $101 billion.
Analysts now forecast more than $1 trillion of capital expenditure during 2027, an increase of more than $100 billion from previous estimates. Capital spending is also expected to exceed operating cash flow between 2026 and 2028.
At the same time, cloud revenue growth accelerated to 48% during the quarter, exceeding expectations and providing evidence that heavy AI investment is translating into stronger demand.
Earnings Strength Could Cushion Further AI Volatility
Goldman’s analysis suggests the broader U.S. equity market has substantial earnings support even if volatility continues among artificial intelligence stocks.
With earnings growth expanding beyond a small group of technology leaders, the equal-weight S&P 500 continuing to advance and forward profit forecasts moving higher, corporate fundamentals remain constructive.
The central question is whether accelerating AI revenues can eventually justify the enormous investment required to build the supporting infrastructure. For now, stronger-than-expected cloud growth and robust corporate earnings provide a potential buffer against continued volatility in AI-related shares.