U.S. stocks to face key test in Q2 earnings season! Goldman Sachs offers optimistic outlook: corporate profits expected to grow strongly again

According to The Zhihui Finance, Goldman Sachs strategists led by Ben Snider stated in a report released on June 26 that after almost all the momentum driving the S&P 500's rise in the past year came from corporate earnings growth, the upcoming Q2 earnings season will become a critical test for the U.S. stock market.

Wall Street’s major banks will kick off the Q2 earnings season in the week of July 13, and by early August, around three-quarters of the S&P 500’s total market capitalization will have reported results. As the current largest listed company by market value, Nvidia (NVDA.US) is expected to release its financial report on August 26.

Goldman Sachs anticipates that, supported by a stable economic environment and continued investment in artificial intelligence (AI) infrastructure, corporate earnings in Q2 will once again achieve strong growth. Currently, analysts generally expect Q2 earnings per share (EPS) for S&P 500 components to increase by 22% year-on-year, which would be the highest pre-earnings growth expectation since 2021.

For investors, the importance of this earnings season stands out, as the main driver of stock market gains over the past year was not valuation expansion, but corporate earnings growth. Over the past year, the S&P 500 index has risen sharply, but its expected price-to-earnings (P/E) ratio has remained at around 20 times. If companies can continue to deliver results that exceed expectations, the market rally is likely to receive further support. However, as profit expectations rise, companies that fail to meet increasingly optimistic investor expectations will face a greater risk of disappointment.

Q1 Corporate Earnings Exceed Expectations

Goldman Sachs noted that Q1 corporate earnings significantly beat market expectations this year. Previously, analysts expected Q1 earnings to grow by 12% year-on-year, but the actual increase reached 27%, 15 percentage points above expectations.

Goldman Sachs expects Q2 earnings performance to remain strong, but given the already high market expectations, the upside surprise may be narrower than in Q1. Goldman Sachs projects that for the full year 2026, S&P 500 component EPS will increase by 24%.

The AI sector remains the core driver of corporate earnings growth. Goldman Sachs expects companies related to AI infrastructure to contribute nearly 60% of total S&P 500 earnings growth in Q2. Among them, Micron Technology (MU.US) and Nvidia are predicted to account for more than 40% of the index’s earnings growth combined. Other major contributors include Broadcom (AVGO.US), Microsoft (MSFT.US), Google (GOOGL.US), and Apple (AAPL.US).

By industry, Goldman Sachs predicts technology and energy sectors to be the two fastest-growing in terms of earnings. Supported by rising energy prices, energy sector (XLE) earnings are expected to more than double year-on-year, while information technology sector earnings are expected to increase by nearly 60%. In contrast, earnings growth for industries such as health care (IYH) and consumer discretionary (IYC) is expected to be relatively weak.

Investors will also closely watch whether companies can maintain profit margins in the face of rising costs. According to Goldman Sachs, rising energy prices and ongoing supply chain pressures have increased input costs for many firms. As a result, analysts have lowered their margin forecasts since the end of the Q1 earnings season. Current consensus estimates suggest that the median profit margin for S&P 500 component companies will remain roughly flat compared to a year earlier.

Can Hyperscale Cloud Computing Companies’ AI Capex Deliver Returns?

Another major area of focus will be the capital expenditures of large tech firms—commonly referred to as hyperscalers—on AI infrastructure. Goldman Sachs noted that investors are increasingly eager to see these companies, after investing hundreds of billions of dollars in AI-related capital expenditure, generate tangible returns through increased revenue and profitability. Although Goldman Sachs believes capital expenditure budgets for 2026 are essentially set, management commentary on 2027 investment plans will become increasingly important later this year.

Beyond the tech giants, investors are also paying closer attention to the progress of other American companies in applying AI. Goldman Sachs stated that many firms are supporting AI investment via additional budget allocations rather than cutting other expenditures, sparking questions in the market about how long it will take for such investments to translate into profit growth.

Despite the optimistic earnings outlook, Goldman Sachs pointed out that investor sentiment has grown increasingly bullish. The Goldman Sachs U.S. Equity Sentiment Indicator recently rose to its highest level since December 2024, indicating that market expectations ahead of earnings season are already quite high.

Currently, Goldman Sachs expects the S&P 500 to rise to 8,000 points by the end of 2026, about 9% higher from current levels. This forecast is based on continued growth in corporate earnings and Goldman Sachs's expectation that the U.S. economy will still achieve around 2% growth this year.