As of July 31, 61% of the constituents in the S&P 500 had reported earnings. According to a report from Goldman Sachs’ strategy team, 64% of these companies posted earnings per share (EPS) that exceeded consensus expectations by at least one standard deviation, marking one of the highest such proportions on record. Excluding “other income” from equity investments by tech giants, the tracked year-over-year EPS growth rate for the S&P 500 in the second quarter reached 26%, the fastest since 2021. When including the aforementioned income, the overall growth rate surged to 45%, far exceeding the prior expectation of 22%.
Despite the notable breadth of earnings beats, the market’s reward for upside surprises has been relatively restrained. In particular, within the technology, media, and telecom (TMT) sector, stocks that beat expectations underperformed the S&P 500 by an average of 192 basis points on the day following the earnings release, while non-TMT peers that beat outperformed by an average of 75 basis points. By comparison, over the past two decades, S&P 500 stocks that beat expectations have outperformed the index by an average of 95 basis points on the day after reporting, but that figure has narrowed to just 39 basis points this quarter. Nonetheless, the equal-weighted S&P 500 has moved higher in tandem with EPS, indicating that fundamentals outside the AI space remain solid and that the broader bull market structure remains intact.
Looking at the earnings composition, 19 percentage points of the overall S&P 500 EPS growth in the second quarter came from “other income” related to approximately $151 billion in equity investments by Alphabet (GOOGL) and Amazon (AMZN), with Microsoft (MSFT) contributing an additional roughly $3 billion. After excluding these items, the 26% growth rate still stands notably above the 20% seen in the first quarter. On a median stock basis, the tracked year-over-year EPS growth for the median S&P 500 stock stands at 12%, also higher than the 9% expectation ahead of the earnings season, suggesting that growth is not being driven solely by a handful of mega-caps.
Notably, AI infrastructure-related stocks contributed approximately one-third of the EPS growth in the second quarter. Analysts project that this share will rise to more than 50% by the second half of 2026 and into 2027. Alphabet, Amazon, Micron Technology (MU), and Nvidia (NVDA) were the largest individual contributors for the quarter. The strong results have also driven broad upward revisions to forward earnings expectations. Since the start of the third quarter, the bottom-up consensus estimate for S&P 500 2027 EPS has been revised up by about 1%. However, margin pressure from costs remains a key risk, with margin expectations for most sectors being downgraded for the third quarter.
Earnings reports from hyperscale cloud providers have sent positive signals. Combined cloud revenue for Alphabet, Amazon, and Microsoft grew 48% year-over-year in the second quarter, a notable acceleration from the 39% growth seen in the first quarter. Analysts forecast that the four companies, including Meta (META), will grow revenue at an annualized rate of 18% over the next two years.
At the same time, capital expenditure levels have expanded substantially. In the second quarter, the above-mentioned companies collectively disclosed $182 billion in capital expenditures, while free cash flow stood at only about $5 billion, and they raised a combined approximately $101 billion through debt and equity financing. Analyst projections for hyperscale capital expenditures in 2027 have jumped from $929 billion before the earnings season to over $1 trillion. Management teams across these companies have also commented on financing strategies, indicating that they will support ongoing AI infrastructure investments through diversified means including debt, equity, and partnerships.
The recent volatility in AI-related stocks is consistent with the typical consolidation patterns that follow sharp momentum rallies. Goldman Sachs’ strategy team noted that since 1980, momentum factors that have risen more than 20% over a three-month period have typically entered a correction phase. With significant deleveraging by hedge funds and ETF investors, and with the earnings season confirming strong fundamentals, subsequent rotation volatility is expected to moderate. Goldman Sachs maintains its S&P 500 year-end 2026 price target of 8000 and its 2027 EPS forecast of $385. The market is now awaiting Nvidia’s second-quarter results, due on August 26, for clearer directional signals.
