Goldman Sachs Partner: Profit is the core drive, and the S&P 500 is expected to hit a new historical high within the year.

Strong corporate earnings are providing the most powerful 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 expected to hit a new historical high within the year, driven fundamentally by earnings. According to Goldman Sachs data, the year-on-year earnings per share (EPS) growth rate tracking for the S&P 500 index in the second quarter reached a staggering 45%, far exceeding the market consensus estimate of 22% at the beginning of the quarter. Even when excluding approximately $151 billion of non-recurring "other income" related to equity investments by Alphabet and Amazon, the S&P 500 EPS growth rate still reached 26%, not only accelerating from the first quarter but also representing the fastest growth rate since 2021. Meanwhile, analysts have already begun to raise their earnings expectations for 2027, with the revision direction showing positive trends across most sectors. On the positioning front, Goldman Sachs sentiment and positioning indicators have pulled back from previous highs, with rapid positioning indicators generally turning bearish. Hedge funds are noticeably de-leveraging, and retail investor leverage has also begun to cool off. John Flood believes this "cleaner" positioning environment creates conditions for further market upside. Earnings surpass expectations, growth at a five-year high Goldman Sachs data shows that the year-on-year EPS growth rate tracking for the S&P 500 index in the second quarter reached 45%, significantly surpassing the consensus estimate of 22% at the beginning of the quarter. Among this growth, 19 percentage points came from "other income" related to equity investments totaling $151 billion by Alphabet and Amazon, while Microsoft contributed approximately $3 billion in similar income. Excluding these non-core sources of income, the S&P 500 EPS growth rate still stands at 26%, further accelerating from the first quarter and achieving the fastest growth pace since 2021. At the individual stock level, the median year-on-year EPS growth rate tracking for S&P 500 constituents reached 12%, also exceeding the initial 9% consensus estimate, indicating that the earnings improvement is broad-based and not solely driven by a few tech giants. Forward expectations continue to be revised upward, with a positive breadth of revisions The strong second-quarter performance not only reflects past operational achievements but also propels analysts to continuously raise their forward earnings forecasts. Since the beginning of the third quarter, the market consensus forecast for the S&P 500 index EPS in 2027 has been revised upward by about 1%, with the energy and financial sectors receiving the largest upward adjustments. In terms of breadth of revisions, the number of companies in the S&P 500 whose earnings expectations have been revised upward continues to outnumber those with downward revisions, maintaining a positive breadth of revisions. Goldman Sachs believes this comprehensive upward revision trend is an important foundation supporting market valuations. Positioning "de-leveraging" creates space for upward movement In terms of market sentiment and positioning, Goldman Sachs sentiment and positioning indicators have dropped to the 53rd percentile, marking a significant decline from previous highs. Most rapid positioning indicators have turned bearish: while futures positions remain high, they are no longer at extreme levels, the call/put ratio has decreased, investor surveys indicate a decline in optimism, and the equity positioning of actively managed funds (NAAIM index at 79.7) has also contracted. On the hedge fund front, de-leveraging has been particularly significanttotal leverage has retraced half of this year's gains, and net leverage has decreased compared to the beginning of the year. For retail investors, leverage levels are beginning to cool off, with margin balances in the South Korean stock market declining from historical highs, and the scale of financing purchases in Japan retracing from its highest level since 1990. The buying enthusiasm of U.S. investors for semiconductor stocks has also slowed down. John Flood believes that the "de-leveraging" of the aforementioned positions signifies a healthier market structure, reducing potential selling pressure and creating more favorable conditions for the index to rise further. Valuations are relatively low, and the AI cycle provides long-term support From a global comparative perspective, Goldman Sachs data indicates that U.S. stock market valuations are currently at relatively "cheap" levels compared to other major markets. Meanwhile, John Flood points out that the primary benefits of the AI supercycle have yet to be fully realized, and the world's largest technology companies are continuing to increase capital investments, continually expanding the breadth and depth of earnings improvement. However, Goldman Sachs also cautions about a seasonal risk worth noting: in the 13 midterm election years since 1974, the median return rate of the S&P 500 index from early August to election day has been 0%. This suggests that even if the earnings fundamentals continue to improve, John Flood's prediction of a new high within the year still carries uncertainty regarding the timing. Goldman Sachs conclusion is that the earnings outlook provides strong support for bulls, but whether this can be sustained remains a key variable.