Goldman Sachs Views S&P 500 Earnings Surge as Temporary Cycle

Goldman Sachs has characterized the exceptional earnings growth within the S&P 500 as a temporary cyclical acceleration rather than a speculative bubble. According to a recent client note, second-quarter 2026 earnings per share grew 51% year-over-year, while the trailing four-quarter increase stood at 26%. This pace of expansion is comparable only to the post-recession rebounds seen in 2010 and 2021, pushing corporate profits significantly above their long-term trends and historical relationships with GDP growth.

Despite the surge in trailing metrics, valuation multiples have not expanded proportionally. The firm noted that the forward 12-month price-to-earnings ratio has actually contracted from 23x a year ago to 19x, aligning with the 10-year average. This divergence suggests that the current earnings strength is being driven by specific, reversible factors rather than a broad-based re-rating of equity values. The analysis identifies three primary sources of this temporary over-earning, each with distinct expiration dates and potential negative impacts on future growth rates.

AI Capex Drives Temporary Earnings Boost

The investment boom in artificial intelligence accounts for nearly half of the S&P 500 EPS growth this year, according to the report. Mega-cap hyperscalers such as Amazon, Meta, Microsoft, and Alphabet are on track to spend $800 billion on capital expenditures in 2026, a 94% increase from 2025 levels. However, Goldman Sachs expects this tailwind to fade as capex growth decelerates and depreciation expenses rise. The contribution to earnings is projected to shift from an 11 percentage point boost in the current year to a marginal drag by 2028.

Semiconductor margins have also expanded dramatically, contributing to the overall earnings surge. Memory firms are currently enjoying gross margins near 80%, which is more than double their historical averages. The bank estimates that this margin expansion drives about one-quarter of semiconductor earnings growth in 2026. If chip gross margins were to revert from the current 70% level to their 15-year average of 55%, S&P 500 earnings would decline by roughly 10%, highlighting the vulnerability of the current profit structure to mean reversion.

Private Investment Gains Inflate Quarterly Results

Appreciating equity stakes in private companies have further inflated reported earnings. Mega-cap technology firms generated over $150 billion in other income from these private investment gains in the second quarter of 2026 alone. This non-operational income accounted for 12% of total S&P 500 EPS during the period. Goldman Sachs anticipates that this contribution will diminish significantly in 2027, creating an 8 percentage point drag on year-over-year growth comparisons as the base effect from these one-time gains fades.

Long-Term Growth Relies On AI Productivity

Even after accounting for these temporary headwinds, the firm maintains a positive outlook for sustained earnings growth. Goldman Sachs forecasts S&P 500 EPS growth of 11% in both 2027 and 2028, with earnings reaching $415 and $460 respectively. This projection is supported by solid GDP growth and an increasing boost from AI productivity gains, estimated to add 1 to 2 percentage points to annual growth rates. The bank’s 12-month index target of 8,700 points, representing a 14% increase, reflects the view that continued earnings expansion remains the primary driver of the market's performance, as detailed in the analysis from GN markets/earnings (en-US).