Goldman Sachs: AI Stock Volatility Not the End of Bull Market, Q2 Corporate Earnings Remain Key Support

Goldman Sachs (GS-US) has released new research indicating that investors should not interpret the recent sharp volatility in artificial intelligence (AI)-related stocks as a precursor to a broader market crash. The firm argues that while momentum-driven tech stocks have seen a clear correction, corporate earnings remain robust, profit expectations continue to be revised upward, and increasing evidence shows that massive AI investments are beginning to translate into tangible returns. As a result, market focus has shifted from whether AI spending is excessive to whether corporate profits can sustain this investment wave.

Ben Snider, Goldman Sachs' chief U.S. equity strategist, stated that while the recent sell-off in AI-related stocks came suddenly, it closely resembles historical correction patterns seen when momentum trading becomes overly concentrated. Past experience suggests such episodes typically undergo a period of consolidation before resuming long-term upward trends, rather than evolving into full-blown bear markets.

Goldman also noted that hedge funds and exchange-traded fund (ETF) investors have recently significantly reduced their leverage, helping to mitigate market volatility. Overall, current market fundamentals are far healthier than recent stock price movements suggest.

The report suggests that AI-related trading may continue to experience sharp rotations and volatility, but as long as corporate earnings do not deteriorate significantly, the current bull market will remain grounded in sustained earnings growth rather than purely speculative capital flows.

Goldman emphasized that second-quarter earnings performance will be a crucial support for U.S. equities. As of July 31, companies representing about two-thirds of the S&P 500's market capitalization had reported Q2 results, with 64% of them exceeding Wall Street's earnings 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 from a few tech giants, S&P 500 companies posted a 26% year-over-year increase in Q2 earnings. When including these gains, core earnings growth reached an even higher 45%.

Even mid-tier companies generally outperformed market expectations. Goldman estimates that overall S&P 500 earnings growth for Q2 was approximately 12%, surpassing analysts' initial forecast of 9% at the start of the quarter, indicating continued improvement in corporate earnings momentum.

Snider pointed out that the AI infrastructure supply chain remains the primary driver of corporate earnings growth. Goldman estimates that AI infrastructure companies contributed about one-third of the S&P 500's Q2 earnings growth, and this share is expected to exceed 50% for the remainder of 2026 and into 2027.

Among these, Alphabet (GOOGL-US), Amazon (AMZN-US), Microsoft (MSFT-US), NVIDIA (NVDA-US), and Broadcom (AVGO-US) are the main beneficiaries of AI-driven profit growth.

However, Goldman emphasized that earnings improvements are not limited solely to AI beneficiaries. Excluding the impact of mega-cap tech stocks, the equal-weighted S&P 500 index continues to rise, reflecting solid overall corporate fundamentals and a broadening market rally across more industries.

Strong earnings have also prompted Wall Street to continue raising future profit forecasts. Goldman noted that since the start of Q3, market expectations for S&P 500 companies' 2027 earnings per share (EPS) have been revised upward by about 1%, with most sectors seeing upgrades, particularly energy and financials.

Nevertheless, Goldman warned that corporate profit margins remain a key area to watch. The report indicates that most companies have largely absorbed the impact of rising tariffs and energy costs, but analysts have begun lowering profit margin forecasts for many firms, suggesting that even with stable revenue, cost pressures could erode future profitability.

Regarding AI investment, Goldman believes that mega-cloud providers are not slowing down but are instead accelerating spending. Alphabet, Amazon, and Microsoft reported 48% year-over-year revenue growth in their cloud businesses in Q2, up from 39% in the previous quarter. Meta Platforms (META-US) also met revenue growth expectations, leading analysts to further raise future capital expenditure forecasts.

Goldman's latest estimate suggests that by 2027, global mega data center operators' capital expenditures will exceed $1 trillion—over $100 billion more than previously estimated before this earnings season began.

However, such massive investments bring substantial funding needs. Data shows that the five largest cloud companies collectively spent $182 billion in capital expenditures in Q2, while generating only about $5 billion in free cash flow—resulting in a $177 billion gap. To bridge this shortfall, these firms raised approximately $101 billion through debt and equity financing this quarter.

Goldman argues that large-scale financing should not be seen as a warning sign, but rather as evidence that investors believe AI investments will generate sufficient future revenue and profit growth to support continued capital spending. Analysts expect that even as capital expenditures rise over the next two years, cloud service providers' revenue growth will outpace spending increases, further solidifying the long-term fundamentals of AI investment.