The US stock market will face a crucial test in the Q2 earnings season! Goldman Sachs is optimistic about the outlook: corporate profits are expected to show strong growth again.

Goldman Sachs Group, Inc. strategist Ben Snyder and others stated in a report released on June 26 that after nearly all the driving factors pushing the S&P 500 index higher in the past year came from corporate profit growth, the upcoming second quarter earnings season will be a key test for the US stock market. Wall Street banks will kick off the second quarter earnings season the week of July 13, with about three quarters of the total market value of the S&P 500 index expected to report earnings by early August. As the current largest publicly traded company by market value, NVIDIA Corporation (NVDA.US) is expected to report earnings on August 26. Goldman Sachs Group, Inc. expects that due to the stable economic environment and ongoing investment in artificial intelligence (AI) infrastructure, corporate profits in the second quarter will once again achieve strong growth. Analysts generally expect earnings per share (EPS) for S&P 500 index components in the second quarter to increase by 22% year-on-year, which would be the highest profit growth expectation since 2021. For investors, the importance of this earnings season is particularly significant, as the main driver of the stock market's rise in the past year has not been valuation expansion but rather corporate profit growth. While the S&P 500 index has risen significantly over the past year, its forward price-to-earnings ratio (P/E) has remained at around 20x. If companies can continue to beat expectations, the market rally is likely to receive further support. However, as profit expectations continue to rise, companies that fail to meet investors' increasingly optimistic expectations will face greater disappointment risk. First quarter corporate profit performance exceeded expectations Goldman Sachs Group, Inc. pointed out that corporate profit growth in the first quarter of this year significantly exceeded market expectations. Analysts had previously expected a 12% year-on-year increase, but the actual growth was 27%, surpassing expectations by 15 percentage points. Goldman Sachs Group, Inc. expects earnings performance to remain strong in the second quarter, but due to already high market expectations, the magnitude of outperformance may be narrower than in the first quarter. Goldman Sachs Group, Inc. predicts that full-year earnings per share for S&P 500 index components will increase by 24% in 2026. The AI sector remains a core driver of corporate profit growth. Goldman Sachs Group, Inc. expects that AI infrastructure-related companies will contribute to nearly 60% of the overall profit growth of the S&P 500 index in the second quarter. Among them, Micron Technology, Inc. (MU.US) and NVIDIA Corporation are expected to contribute more than 40% of the index's profit growth. Other major contributors include Broadcom Inc. (AVGO.US), Microsoft Corporation (MSFT.US), Alphabet Inc. Class C (GOOGL.US), and Apple Inc. (AAPL.US). By industry, Goldman Sachs Group, Inc. predicts that the technology and energy sectors will be the two fastest-growing sectors in terms of profit growth. The energy sector (XLE) is expected to grow by over 100% year-on-year, driven by rising energy prices, while the information technology sector is expected to grow by nearly 60%. In contrast, industries such as healthcare (IYH) and consumer discretionary (IYC) are expected to have relatively weak profit growth. Investors will also closely monitor whether companies can maintain profit margins amid rising costs. Goldman Sachs Group, Inc. stated that rising energy prices and continued supply chain pressures have led to increased input costs for many companies, leading analysts to lower profit margin forecasts since the end of the first quarter earnings season. The consensus market expectation currently indicates that the median profit margin of S&P 500 index component companies will remain largely unchanged from the same period last year. Can massive cloud computing enterprise AI capital expenditures bring returns? Another major focus will be on large technology companies - often referred to as hyperscalers - who are making capital expenditures on AI infrastructure. Goldman Sachs Group, Inc. stated that investors are increasingly eager to see that after these companies invest billions of dollars in AI-related capital expenditures, they can deliver tangible returns through revenue and profit growth. While Goldman Sachs Group, Inc. believes that the capital expenditure budget for 2026 is largely determined, management's stance on investment plans for 2027 will become increasingly important later this year. In addition to tech giants, investors are also increasingly interested in the progress of other US companies in AI applications. Goldman Sachs Group, Inc. stated that many companies are supporting AI investments by adding budgets rather than cutting other expenses, which has also raised questions in the market about how long these investments will take to profit growth. Although profit prospects remain optimistic, Goldman Sachs Group, Inc. pointed out that investor sentiment has become increasingly positive. Goldman Sachs Group, Inc.'s US stock market sentiment index recently reached its highest level since December 2024, indicating that market expectations are quite high before the earnings season begins. Currently, Goldman Sachs Group, Inc. expects the S&P 500 index to rise to 8000 points by the end of 2026, representing a potential 9% increase from current levels. This forecast is based on continued corporate profit growth, as well as Goldman Sachs Group, Inc.'s expectation that the US economy will achieve around 2% growth this year.