Goldman Sachs: S&P 500 Q3 Earnings Up 33%, but Growth Slows; Non-AI Stocks Rally

Article by: Tide Research

Profits remain strong, but the phase of "getting better and better" may already be behind us.

Source: Goldman Sachs U.S. Portfolio Strategy Team, "US Weekly Kickstart: Q3 2026 Midseason Earnings Update," published October 30, 2026 (Eastern Time).

As of October 30, 60% of S&P 500 companies have reported their third-quarter earnings. Goldman Sachs’ conclusion can be summarized in one sentence: earnings growth remains strong, but is no longer accelerating.

S&P 500 EPS year-over-year growth in Q3 was around 33%, flat with Q2 and among the strongest quarterly gains in decades outside of post-recession recoveries. However, the momentum of accelerating growth seen over the past few quarters has stalled. Analysts are still raising their 2027 earnings forecasts, but the magnitude and breadth of these upgrades are diminishing. Hyperscaler capital expenditure expectations remained nearly unchanged this quarter, leading Goldman Sachs to conclude that the growth rate of AI-related capex is peaking.

The internal market structure is also shifting: since the start of earnings season, the S&P 500 has declined 3%, while the S&P 500 excluding AI-related stocks has risen 5%. The previously highly concentrated market rally is now dispersing, as AI stocks experience a catch-up decline while non-AI stocks see a catch-up gain.

Goldman Sachs maintains its S&P 500 target of 8,000 by year-end and 8,700 over 12 months, representing upside potential of 4% and 13% respectively from the current level of 7,720.

Key figures:

• S&P 500 third-quarter EPS growth year-over-year was approximately 33% (excluding large tech stocks and other income related to equity investments), matching the actual growth rate in the second quarter; the 10-year median is only 10%.
• The median EPS growth rate of the constituent stocks is 12%, higher than the 10-year median of 8%, but slower than the 14% recorded last quarter.
• After excluding one-time items, Goldman Sachs expects S&P 500 EPS growth to decline from nearly 30% in 2026 to 18% in 2027, still at a high level.
• The median company's revenue growth rate slightly slowed, while its net profit margin reached a new high.

The proportion of earnings beats is declining. Among companies that have reported earnings, 60% exceeded consensus EPS estimates by more than one standard deviation, above the historical average of 50% but below the 64% average over the past four quarters. Overall, third-quarter earnings for the index still beat expectations, though the magnitude of the beats was smaller than in the first and second quarters.

Growth was driven by two sectors. Information technology and communication services together contributed more than 60% of the S&P 500's EPS growth in the third quarter, while energy contributed approximately 20%. The year-over-year EPS growth rates for each sector in the third quarter are as follows:

Energy EPS grew 138%, driven by a sharp rise in oil prices. Profit margins for median companies in the industrial sector have expanded significantly for several consecutive quarters and continued to rise in Q3. Meanwhile, profit margins in the consumer staples sector have remained under sustained pressure.

In the previous quarters, stocks of companies that exceeded earnings expectations consistently underperformed. This quarter, the trend has reversed.

• Stocks with EPS exceeding expectations by the median beat the S&P 500 by 152 basis points the day after earnings, above the historical median of 95 basis points.
• The sectors with the highest rewards were cyclical stocks: Industrials +371 bps, Consumer Discretionary +326 bps, Materials +204 bps, and Financials +183 bps. Goldman Sachs noted that hedge fund positions in these sectors had previously declined significantly.
• TMT sectors that exceeded expectations were largely not rewarded: Communications Services -419bps, Information Technology -60bps, TMT overall -76bps, while non-TMT sectors gained +172bps. Consumer Staples (-181bps) was also among the few sectors that underperformed after exceeding expectations.

Lightly held cyclical stocks can see price gains from good news, while heavily held tech stocks have already priced in positive developments.

This week’s performance rankings (through October 30) confirm this trend. The largest declines were among software and semiconductor companies: ServiceNow fell 34%, F5 fell 26%, Fortinet and Intel each dropped 24%, Twilio declined 22%, and Marvell fell 14%. Among the top gainers were Pentair and Vertiv (each up 20%), Carvana (up 18%), and General Motors (up 15%).

This is the most valuable set of data in the report for evaluating trades:

• Since the start of the Q3 earnings season, 70% of S&P 500 components have reported positive earnings, but these companies account for only 50% of the index's market capitalization.
• The S&P 500 fell 3%, while the S&P 500 excluding AI rose 5%.

Goldman Sachs interprets this as the previously extremely narrow market breadth broadening through a pullback in AI stocks and gains in the rest of the market. The data mentioned earlier also indicates that the rally in non-AI stocks is supported by fundamentals: the median non-TMT stock that beat earnings expectations outperformed by 172 basis points the following day.

Year-to-date total return data illustrates this divergence (pricing as of October 29):

• Crude Oil (S&P GSCI) +128%, Energy Sector +57%, Russell 1000 Value +26%, Information Technology +25%;
• Equal-weight S&P 500 +16%, market-cap-weighted S&P 500 +14%, Russell 1000 Growth only +3%;
• Communication services -10%, Bitcoin -11%, 10-year U.S. Treasury bonds -3%, Gold -7%.

Goldman Sachs noted that whether non-tech sectors can continue to rise depends crucially on the trajectory of energy prices and interest rates.

In previous quarters, after each earnings season, the market raised its capital expenditure expectations for hyperscale cloud providers. This time, it did not.

Consensus expectations (Amazon, Google, Meta, Microsoft, Oracle, etc.):

After the quarterly earnings report, the expected $1.2 trillion in 2027 is only slightly higher than before the report.

Goldman Sachs believes that capital expenditures will still increase significantly by 2027, but both the peak in the growth rate of capital expenditures and the peak in the upside surprise have already occurred.

This directly impacts the profitability of the AI infrastructure chain:

• EPS growth for AI infrastructure stocks such as semiconductors and power reached approximately 80% year-over-year in the third quarter, more than five times that of the remaining S&P 500 components (15%);
• Consensus expectations indicate that this growth rate will slow significantly over the next several quarters, reaching approximately 40% by the end of 2027.

Cash flow pressure has also emerged. The largest cloud providers collectively reported negative free cash flow in Q3, with capital expenditures exceeding operating cash flow. Analysts expect these companies' free cash flow to continue declining through 2027, turning positive only in 2028.

Evidence of AI investment returns continues to grow, making it one of the few metrics in the report that is still accelerating:

• Amazon, Google, and Microsoft's cloud revenues grew 54% year-over-year in the third quarter, compared to 48% and 39% in the first two quarters.
• The cloud revenue backlog of the three companies continued to grow rapidly, but the growth rate this quarter slowed slightly compared to the second quarter.

The issue lies in expectations. Before the earnings report, hedge funds had concentrated positions in the hyperscale cloud providers. Although cloud revenue exceeded consensus estimates, it still fell short of investor expectations.

At the same time, the third-quarter earnings report has refocused market attention on AI disruption risks, particularly evident in the TMT sector. Goldman Sachs analysts noted disappointing search revenue for Google and reduced traffic referrals from Reddit; Goldman Sachs economists also observed several early signs of AI’s impact on the labor market.

• Since the start of earnings season, the consensus EPS estimate for the S&P 500 in 2027 has been raised by 2%.
• More companies were upgraded than downgraded, but the breadth of revisions narrowed significantly compared to previous months, with only half of the sectors still positive.

Over the past month, the breadth of EPS revisions for 2027 by sector (number of upgrades minus number of downgrades, divided by total number of companies):

• Strongest: Information Technology 64%, Energy 43%, Industrials 24%, Financials 20%; S&P 500 overall 10%
• Weakest: Real Estate -39%, Consumer Staples -36%, Consumer Discretionary -28%, Communication Services -18%

One detail: Among companies that have released their earnings reports, analysts have generally raised their 2027 revenue forecasts while lowering their profit margin expectations. The largest revenue increases were seen in energy and information technology; profit margins were reduced primarily due to rising input costs, such as energy, a point reflected in both management statements and analyst revisions.

S&P 500 targets and earnings forecasts (current price: 7,720 points, as of October 29):

Note: This refers to Goldman Sachs' adjusted EPS metric, which differs from the口径 mentioned above of nearly 30% in 2026 and 18% in 2027 after excluding non-recurring items.

Several key judgments:

• Valuation: The S&P 500’s forward P/E ratio is 19x, consistent with the bottom-up consensus estimate. Goldman Sachs believes that despite multiple contraction and increased macro volatility, earnings improvement still positions the S&P 500 for a fourth consecutive year of double-digit returns.
• More conservative than the market for 2027: Goldman Sachs’ 2027 EPS growth forecast is 11%, below the bottom-up consensus estimate of 16%. The gap is primarily driven by Information Technology (Goldman Sachs: +33%, consensus: +41%) and Communication Services (Goldman Sachs: -18%, consensus: -9%).
• Sector Allocation: Goldman Sachs' overweight (OW) sectors are healthcare and materials.
• Sector valuations: Communication services have a forward P/E of 16x, at the 4th percentile over the past 10 years, making it the cheapest sector; healthcare is at 20x, at the 96th percentile over 10 years; consumer staples are at 23x, at the 92nd percentile over 10 years.

Goldman Sachs Cross-Asset 12-Month Forecast (see accompanying table in the same report):

• U.S. 10-year Treasury yield: Currently at 5.0%, 12-month target at 4.5% (-53 bps)
• Brent Crude: Currently $111/barrel, 12-month target $75 (-32%)
• COMEX Gold: Currently $4,031 per ounce, 12-month target $5,140 (+27%)

Cash flow: Over the past 12 months, U.S. mutual funds and ETFs saw cumulative inflows of approximately $380 billion into equities, $501 billion into money market funds, and $839 billion into bonds.

1. Energy prices: Energy was the second-largest source of profit in the third quarter and the primary reason for margin reductions across most sectors. Goldman Sachs expects Brent crude to decline to $75 within 12 months. Lower oil prices will weaken energy profits but support margin recovery in other sectors, with significant structural implications.
2. Interest rates: The 10-year U.S. Treasury yield is at 5.0%, and Goldman Sachs expects it to decline to 4.5%. If interest rates do not fall, the potential for continued upward adjustment in high-valued non-tech sectors will be limited.
3. AI Profit Slowdown: AI infrastructure stocks are expected to see profit growth rates decline from 80% to around 40% by the end of 2027, alongside a turn negative in free cash flow. If capital expenditure expectations begin to be revised downward, this chain will be directly impacted.
4. AI disruption: Concerns over disruption in search, software, and other sectors are intensifying, with software stocks leading the declines this week.
5. Earnings surprise: Goldman Sachs’ 2027 EPS forecast is approximately 2% lower than the consensus estimate, primarily driven by technology and communication services. These two sectors would face the greatest revision pressure if the consensus were to align with Goldman Sachs’ outlook.
6. Upcoming earnings reports: Next week, 143 more companies (accounting for 21% of the S&P 500's market capitalization) will release their earnings, with 29% of the information technology sector's market cap being disclosed next week.

Disclaimer

This article is a compilation and interpretation by Chaoxiang Research of a third-party brokerage research report (Goldman Sachs, October 30, 2026). The target prices, earnings forecasts, sector allocations, and related judgments cited herein reflect the views of the brokerage's analysts and represent the position of their respective institution, not the views of Chaoxiang Research, nor do they constitute any investment advice.

The market carries risks; make decisions independently. This article should not be used as a basis for buying or selling any securities.