S&P 500 Earnings Season: AI Dominance Masks Deeper Market Weakness

Goldman Sachs forecasts a robust earnings season for the S&P 500, with third-quarter earnings per share (EPS) anticipated to jump 27% year-over-year. The investment bank attributes this strength largely to significant investments in artificial intelligence, with most companies expected to outperform consensus estimates again, according to an October 2 report by Goldman Sachs strategist Ben Snider.

This expected growth rate would represent a slowdown from the 33% increase recorded in the second quarter, excluding certain accounting distortions. However, the headline figures belie a stark concentration of profitability that signals a widening divergence within the broader market.

AI Investment Fuels Concentrated Gains

The majority of the S&P 500’s earnings expansion stems from a select group of companies, particularly those involved in information technology and energy, which are expected to generate nearly 80% of the index’s total growth. AI infrastructure firms alone are projected to account for more than half of the S&P 500’s EPS growth.

The ten largest contributors are forecast to drive 68% of the index’s growth. Micron Technology (MU) and Nvidia (NVDA) together make up over one-third of this contribution. Micron has already reported a substantial year-over-year earnings growth of 1,003%, beating consensus estimates.

This concentration extends beyond earnings to market performance. While the S&P 500 recently traded only 2% below its record high, the median constituent remained 17% below its own record. Goldman Sachs noted that market breadth has fallen to its lowest level since the dot-com bubble, with information technology largely supporting both the index’s earnings and returns.

Median Company Faces Headwinds Among Narrowing Breadth

The outlook for the typical S&P 500 company is considerably less optimistic. Consensus forecasts anticipate only 9% EPS growth for the median company in Q3, a decline from 14% in the second quarter. Revenue growth is also expected to decelerate to 6% from 7% in the previous quarter.

Margins also confront significant pressure. Analysts project the median company’s Q3 net margin at 14.7%, down from 15.1% in Q2. Since the quarter began, median margin estimates have been cut by 11 basis points, as companies grapple with rising input costs. Information technology was the only sector spared from these margin estimate reductions.

Despite these internal pressures, Goldman Sachs sees potential for earnings to exceed expectations due to sustained strong economic growth. The firm estimates nominal U.S. GDP grew approximately 6% year-over-year during Q3, and earnings revision breadth has remained positive.

Hyperscaler Spending Surges, Productivity Metrics Lag

Investors will closely examine upcoming reports for evidence that substantial AI investments are generating tangible revenue returns. Consensus forecasts indicate hyperscaler capital spending is set to jump 116% year-over-year in Q3, accelerating from 87% growth in Q2. Goldman Sachs projects hyperscaler capital expenditure to exceed $1.1 trillion by 2027, growing over 50% that year.

Goldman’s analysts expect combined cloud revenue growth for Amazon (AMZN), Alphabet (GOOG, GOOGL), Microsoft (MSFT), and Oracle (ORCL) to accelerate to 55% in Q3, up from 48% in Q2. Continued proof that AI spending translates into revenue will be crucial for the shares of these hyperscalers and for future capital expenditure expectations.

Companies have been less transparent about AI’s impact on productivity. Approximately half of S&P 500 companies discussed AI in relation to productivity or efficiency during their previous earnings calls, yet only 2% quantified the impact on their financial results. Goldman Sachs anticipates more measurable disclosures in coming quarters.

Goldman Sachs Retains Bullish Outlook Despite Divergence

One tailwind from earlier this year is unlikely to recur. Mega-cap technology firms recorded approximately $150 billion in accounting profits from rising equity investment values during Q2, contributing roughly 12% to S&P 500 EPS. Goldman Sachs does not expect a comparable contribution in Q3 due to a less sharp appreciation of major private investments.

Smaller offsets include tariff refunds, which amounted to roughly $69 billion in Q3, following $77 billion in Q2. Each amount was equivalent to about 6% of U.S. corporate pretax profits, according to Goldman.

Despite the concentrated nature of current growth, Goldman Sachs maintains a constructive broader outlook for the S&P 500. The firm forecasts S&P 500 EPS of $375 for 2026, a 36% increase from 2025, and $415 for 2027. Its year-end 2026 S&P 500 target stands at 8,000, while its 12-month target is 8,700, implying returns of approximately 4% and 13%, respectively, based on the index level cited in their report.

Metric	AI-Driven Leaders (e.g., MU, NVDA, Hyperscalers)	Median S&P 500 Company
Q3 EPS Growth (YoY)	Over 50% of S&P 500 growth (Micron: 1,003%)	9% (down from 14% in Q2)
Q3 Revenue Growth	Hyperscaler Cloud: 55% (up from 48% in Q2)	6% (down from 7% in Q2)
Q3 Net Margin	Information Technology: Stable	14.7% (down from 15.1% in Q2; cut by 11 bps)