Goldman Sachs Partner: Earnings Are the Core Driver, S&P 500 Poised to Hit New ATH This Year

Strong corporate earnings are providing the most robust support for US stock bulls. Goldman Sachs partner John Flood believes that as market positioning becomes "cleaner," the S&P 500 is poised to hit a new ATH within the year, with earnings serving as the core logic behind this judgment.

According to Goldman Sachs data, the trailing year-over-year growth rate for S&P 500 second-quarter earnings per share (EPS) reached 45%, far surpassing the market consensus expectation of 22% at the beginning of the quarter. Even after excluding non-recurring items such as the approximately $151 billion in "other income" related to equity investments from Alphabet and Amazon, the S&P 500 EPS growth rate still stood at 26%. This not only accelerated compared to the first quarter but also marked the fastest growth rate since 2021. Meanwhile, analysts have begun to raise earnings expectations for 2027, with revisions trending positively across most sectors.

In terms of positioning, Goldman Sachs' sentiment and positioning indicators have retreated from previous highs, with quick-positioning indicators generally turning bearish. Hedge fund deleveraging is evident, and leverage among retail investors is also cooling. John Flood believes that this "cleaner" positioning environment creates conditions for further market upside.

Earnings Beat Expectations, Growth Rate Fastest in Five Years

Goldman Sachs data shows that the trailing year-over-year growth rate for S&P 500 Q2 EPS reached 45%, significantly exceeding the consensus expectation of 22% at the start of the quarter. Of this, 19 percentage points of growth came from $151 billion in "other income" related to equity investments from Alphabet and Amazon, with Microsoft also contributing approximately $3 billion in similar income.

After excluding the aforementioned non-core income sources, the S&P 500 EPS growth rate still reached 26%, accelerating further from the first quarter and setting the fastest growth pace since 2021. At the individual stock level, the median trailing year-over-year EPS growth rate for S&P 500 constituents was 12%, also exceeding the initial consensus expectation of 9%. This indicates that earnings improvement has broad breadth and is not driven solely by a few tech giants.

Forward-Looking Expectations Continuously Revised Upward, Revision Breadth Remains Positive

Strong Q2 results not only reflect past operational performance but also drive analysts to continuously raise forward-looking earnings forecasts. Since the start of the third quarter, the market consensus expectation for S&P 500 EPS in 2027 has been raised by approximately 1%, with the energy and financial sectors seeing the largest upward revisions.

In terms of revision breadth, the number of S&P 500 constituents with upward earnings revisions continues to exceed those with downward revisions, keeping the revision breadth positive. Goldman Sachs believes that this comprehensive upward revision trend is an important foundation supporting market valuations.

Positioning "De-bubbling" Creates Room for Upside

Regarding market sentiment and positioning, Goldman Sachs' sentiment and positioning indicators have dropped to the 53rd percentile, a significant retreat from previous highs. Most quick-positioning indicators have turned bearish: while futures positioning remains relatively high, it is no longer at extreme levels; the call/put ratio has declined; investor surveys show waning optimism; and active management funds' US equity exposure (NAAIM Index at 79.7) has also contracted.

At the hedge fund level, deleveraging is particularly significant—gross leverage has given back half of its year-to-date gains, and net leverage has decreased since the beginning of the year. For retail investors, leverage levels are starting to cool. Margin balances in the South Korean stock market have retreated from historical highs, margin buying in Japan has pulled back from its highest level since 1990, and US investors' buying intensity for semiconductor stocks has also slowed.

John Flood believes that the "de-bubbling" of these positions means the market structure is healthier, potential selling pressure has eased, and more favorable conditions have been created for the index to rise further.

Valuation Relatively Low, AI Cycle Provides Long-Term Support

From a global horizontal comparison perspective, Goldman Sachs data shows that US stock valuations are currently at a relatively "cheap" level compared to other major markets.

Meanwhile, John Flood pointed out that the main benefits of the AI super cycle have not yet been fully released. The world's largest technology companies are continuing to increase capital expenditure, driving the breadth and depth of earnings improvement to expand continuously.

However, Goldman Sachs also highlighted a seasonal risk worth noting: in the 13 midterm election years since 1974, the median return of the S&P 500 from early August to Election Day was 0%. This means that even if earnings fundamentals continue to improve, there is still uncertainty regarding the timing of John Flood's prediction for a new ATH within the year. Goldman Sachs' conclusion is that the earnings landscape provides strong support for bulls, but whether it can be sustained remains the key variable.