Goldman Partner: Profit is the Core Driver, S&P 500 Expected to Reach New Historical Highs Within the Year
Author: Zhao Ying
Strong corporate earnings are providing the most robust support for bullish sentiment in the U.S. stock market. Goldman Sachs partner John Flood believes that as market positions become "cleaner," the S&P 500 index is likely to reach new historical highs within the year, driven primarily by profits.
According to Goldman Sachs data, the year-on-year growth rate of earnings per share (EPS) for the S&P 500 index in the second quarter reached 45%, far exceeding the market consensus expectation of 22% at the beginning of the quarter. Even excluding approximately $151 billion in "other income" related to equity investments from Alphabet and Amazon, the S&P 500 EPS growth rate still reached 26%, accelerating from the first quarter and marking the fastest growth rate since 2021. Meanwhile, analysts have begun to raise their profit expectations for 2027, with positive revisions across most sectors.
In terms of positioning, Goldman’s sentiment and positioning indicators have fallen from previous highs, with rapid positioning indicators generally turning bearish. Hedge funds are clearly deleveraging, and retail investor leverage has also begun to cool. John Flood believes that this "cleaner" positioning environment creates conditions for further market upside.
Earnings Exceed Expectations, Growth Rate at Five-Year High
Goldman Sachs data shows that the year-on-year EPS growth rate tracking value for the S&P 500 index in the second quarter reached 45%, significantly surpassing the consensus expectation of 22% at the beginning of the quarter. Of this, 19 percentage points of growth came from approximately $151 billion in "other income" related to equity investments from Alphabet and Amazon, while Microsoft contributed about $3 billion in similar income.
Excluding the aforementioned non-core income sources, the S&P 500 EPS growth rate still reached 26%, further accelerating from the first quarter and achieving the fastest growth pace since 2021. From an individual stock perspective, the median EPS year-on-year growth rate tracking value for S&P 500 constituents was 12%, also exceeding the consensus expectation of 9% at the beginning of the quarter, indicating that profit improvement is widespread and not solely driven by a few tech giants.
Forward Expectations Continue to Be Upgraded, Correction Breadth Remains Positive
Strong second-quarter performance not only reflects past operational achievements but also drives analysts to continuously raise forward profit forecasts. Since the beginning of the third quarter, the market consensus expectation for the S&P 500 index EPS in 2027 has been raised by about 1%, with the energy and financial sectors receiving the largest upward revisions.
In terms of correction breadth, the number of companies within the S&P 500 whose profit expectations have been upgraded continues to exceed those whose expectations have been downgraded, maintaining a positive correction breadth. Goldman Sachs believes that this comprehensive upward revision trend is an important foundation supporting market valuations.
Positioning "De-Bubbling," Creating Space for Upside
In terms of market sentiment and positioning, Goldman’s sentiment and positioning indicators have dropped to the 53rd percentile, significantly retreating from previous highs. Most rapid positioning indicators have turned bearish: while futures positions remain high, they are no longer at extreme levels, the put/call ratio has declined, and investor surveys show a decrease in optimistic sentiment. The equity positioning of actively managed funds (NAAIM index at 79.7) has also contracted.
At the hedge fund level, deleveraging is particularly pronounced—total leverage has retraced half of its gains for the year, and net leverage has decreased since the beginning of the year. For retail investors, leverage levels have begun to cool, with margin balances in the Korean stock market retreating from historical highs, and Japan's margin trading volume also declining from its highest level since 1990. The buying intensity of U.S. investors in semiconductor stocks has also slowed.
John Flood believes that the "de-bubbling" of these positions indicates a healthier market structure, with potential selling pressure alleviated, creating more favorable conditions for the index to rise further.
Valuations Relatively Low, AI Cycle Provides Long-Term Support
From a global comparative perspective, Goldman Sachs data shows that U.S. stock valuations are currently at relatively "cheap" levels compared to other major markets.
At the same time, John Flood points out that the main dividends of the AI supercycle have not yet been fully realized, with the world’s largest tech companies continuing to increase capital investments, expanding the breadth and depth of profit improvements.
However, Goldman also highlights a seasonal risk worth noting: since 1974, the median return of the S&P 500 index from early August to election day in 13 midterm election years has been 0%. This means that even if the profit fundamentals continue to improve, John Flood's prediction of a new high within the year still carries uncertainty in terms of timing. Goldman’s conclusion is that the profit outlook provides strong support for bulls, but whether it can be sustained remains a key variable.
-- Price
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