Goldman Sachs Research Analysis: S&P 500 Q3 Earnings Rise 33% but Show No Further Acceleration as Non-AI Stocks Begin Catching Up

By: Tide Direction Research

Earnings remain robust, but the phase of "getting better and better" may be behind us.

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

Tide Direction Summary

As of October 30, 60% of S&P 500 companies have reported their Q3 results. Goldman Sachs' conclusion can be summed up in one sentence: earnings growth is strong, but it is no longer accelerating.

The year-over-year EPS growth rate for the S&P 500 in Q3 stood at approximately 33%, flat with Q2, making it one of the strongest quarters in decades aside from post-recession recoveries. However, the momentum of quarter-on-quarter acceleration seen in recent quarters has stalled. Analysts are still raising 2027 earnings expectations, but both the magnitude and breadth of these revisions are weakening. Capital expenditure guidance for hyperscalers remained largely unchanged this quarter, leading Goldman Sachs to conclude that the growth rate of AI capex is peaking.

Internal market dynamics are also shifting: since the start of earnings season, the S&P 500 index has fallen 3%, while the ex-AI S&P 500 has risen 5%. The historically concentrated rally is broadening out simultaneously through an AI-related pullback and a catch-up rally in non-AI stocks.

Goldman Sachs maintains its S&P 500 year-end target at 8,000 and its 12-month target at 8,700, implying upside potential of 4% and 13% from the current price of 7,720, respectively.

I. Earnings: Growth at 33%, but Acceleration Has Ended

Key Figures:

• S&P 500 Q3 YoY EPS growth was approximately 33% (excluding "other income" related to large-cap tech and equity investments), flat with actual Q2 growth; the 10-year median is only 10%.
• The median EPS growth across constituents was 12%, higher than the 10-year median of 8%, but slower than the 14% in the previous quarter.
• After excluding non-recurring items, Goldman Sachs expects S&P 500 EPS growth to decline from nearly 30% in 2026 to 18% in 2027, which remains elevated.
• Revenue growth for the median company saw a slight deceleration, while net profit margins hit record highs.

The beat rate is declining. Among companies that have reported, 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. At the aggregate index level, Q3 earnings still beat estimates, albeit by a smaller margin compared to Q1 and Q2.

Growth is driven by two sectors. Information Technology and Communication Services collectively accounted for over 60% of S&P 500 EPS growth in Q3, while Energy contributed roughly 20%. Sector-by-sector Q3 YoY EPS growth rates are as follows:

Sector | EPS Growth | Revenue Growth | Margin Change

Energy | 138% | 25% | +736bp

Information Technology | 67% | 43% | +454bp

Communication Services | 46% | 15% | -75bp

Materials | 39% | 13% | +232bp

Industrials | 23% | 14% | +81bp

Health Care | 4% | 3% | +5bp

Financials | 4% | — | —

Consumer Staples | 2% | 5% | -19bp

S&P 500 | 33% | 12% | —

The 138% surge in Energy EPS was driven by a sharp spike in oil prices. Median margins for Industrials have expanded significantly for several consecutive quarters and continued to rise in Q3. Conversely, margins in Consumer Staples continue to face pressure.

II. Beats Are Rewarded Again, Except for Tech Stocks

In previous quarters, companies that beat earnings estimates consistently underperformed the market average. This quarter marks a reversal.

• The median stock with an EPS beat outperformed the S&P 500 by 152 basis points on the day after earnings release, surpassing the historical median of 95 bps.
• Cyclicals were rewarded the most: Industrials +371bps, Consumer Discretionary +326bps, Materials +204bps, Financials +183bps. Goldman Sachs noted that hedge fund positioning had already declined sharply in these sectors previously.
• TMT beats were barely rewarded: Communication Services -419bps, Information Technology -60bps, with overall TMT at -76bps and non-TMT at +172bps. Consumer Staples (-181bps) is another sector that underperformed despite beating estimates.

To summarize: good news can drive up stocks with low positioning like cyclicals, while good news for heavily positioned tech stocks is already priced in.

This week's (as of Oct 30) performance rankings also corroborate this point. The biggest decliners were mostly software and semiconductor names: ServiceNow down 34%, F5 down 26%, Fortinet and Intel each down 24%, Twilio down 22%, Marvell down 14%. Top gainers included Pentair, Vertiv (both up 20%), Carvana (up 18%), General Motors (up 15%), and others.

III. Market Breadth: Catch-Up Rally and Pullback Occurring Simultaneously

This is one of the most tradeable data sets in the report:

• Since the start of the Q3 earnings season, 70% of S&P 500 constituents have posted positive returns, but these companies account for only 50% of the index's market cap.
• The result is that the S&P 500 index fell 3%, while the ex-AI S&P 500 rose 5%.

Goldman Sachs interprets this as the previously extremely narrow market breadth widening through a pullback in AI stocks alongside gains in the rest. The aforementioned data also indicates that the rise in non-AI stocks is fundamentally supported by earnings: the median non-TMT stock that beat estimates outperformed by 172 bps on the day after earnings.

Year-to-date total return data highlights this divergence (report pricing as of Oct 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 US Treasury -3%, Gold -7%.

Goldman Sachs cautions that whether non-tech sectors can continue to rise will hinge on the trajectory of energy prices and interest rates.

IV. AI Capex: Growth Rate is Peaking

In previous quarters, every end to an earnings season brought upward revisions to hyperscaler capex forecasts. Not this time.

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

Year | Consensus Capex | YoY Growth

2026 | Approx. $808 billion | +96%

2027 | Approx. $1.163 trillion | +44%

2028 | Approx. $1.289 trillion | +11%

Following this quarter's earnings releases, the ~$1.2 trillion expectation for 2027 is only slightly higher than pre-report levels.

Goldman Sachs believes that while capex will still surge significantly in 2027, both events—the peak in capex growth rate and the peak in surprise magnitude—have already occurred.

This directly impacts profitability along the AI infrastructure value chain:

• EPS growth for AI infrastructure stocks such as semiconductors and power equities surged approx. 80% YoY in Q3, more than 5 times that of the remaining S&P 500 constituents (15%);
• Consensus estimates show this growth rate will decelerate noticeably over the coming quarters, dropping to approx. 40% by late 2027.

Cash flow pressures have also emerged. Hyperscalers collectively swung to negative free cash flow in Q3, with capex exceeding operating cash flow. Analysts expect free cash flow for this group to continue contracting through 2027 before turning positive in 2028.

V. AI Monetization Accelerating, but Market Expectations Higher

Evidence of ROI on AI investment continues to mount, representing one of the few indicators in the report that "are still accelerating":

• AWS, Google Cloud, and Azure combined cloud revenue grew 54% YoY in Q3, up from 48% and 39% in the prior two quarters;
• Cloud backlog across the three companies continues to grow rapidly, though the pace slowed slightly compared to Q2.

The issue lies in expectations. Hedge funds held highly concentrated positions in hyperscalers heading into earnings. Although cloud revenue surpassed consensus estimates, it still fell short of investor demands.

Meanwhile, Q3 earnings have reignited market focus on the risk of AI disruption, particularly within the TMT sector. Goldman Sachs analysts cited disappointing search revenue for Google and reduced traffic referral to Reddit from search; Goldman Sachs economists have also observed early signs of AI impacting the labor market.

VI. Earnings Estimate Revisions: Still Positive, but Weakening

• Since the start of earnings season, consensus 2027 S&P 500 EPS estimates have been revised up by 2%.
• Companies revising up still outnumber those revising down, but the breadth of revision has narrowed considerably compared to prior months, with only half of the sectors remaining positive.

Breadth of 2027 EPS estimate revisions by sector over the past month (% shares revising up minus % shares revising down):

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

A key detail: among reported companies, analysts broadly raised 2027 revenue estimates while lowering margin forecasts. Revenue raised the most in Energy and IT; margins were cut primarily due to rising input costs such as energy, reflecting management commentary and analyst adjustments alike.

VII. Goldman Sachs Forecasts & Allocation

S&P 500 Targets & Earnings Forecasts (Current Price: 7,720, as of Oct 29):

Goldman Sachs | Bottom-up Consensus | Top-down Strategist Consensus

2026 EPS | $375 (+36%) | $367 (+33%) | $356 (+30%)

2027 EPS | $415 (+11%) | $425 (+16%) | $410 (+15%)

2028 EPS | $460 (+11%) | $495 (+16%) | —

2026 Year-end Target | 8000 (+4%) | — | —

12-Month Target | 8700 (+13%) | 9150 (+19%) | —

Note: Here, Goldman Sachs uses an adjusted EPS methodology, which differs from the "nearly 30% for 2026 and 18% for 2027 after excluding non-recurring items" mentioned earlier.

Key takeaways:

• Valuation: S&P 500 forward P/E stands at 19x, matching bottom-up consensus. Goldman Sachs believes that despite multiple compression and heightened macro volatility, earnings improvement still gives the S&P 500 a shot at double-digit returns for a fourth consecutive year.
• More conservative than the market for 2027: GS forecasts 11% EPS growth for 2027, below the bottom-up consensus of 16%. The gap primarily stems from IT (GS +33% vs. consensus +41%) and Comm Services (GS -18% vs. consensus -9%).
• Sector Allocation: Goldman's overweight (OW) sectors are Health Care and Materials.
• Sector Valuations: Communication Services trades at 16x forward P/E, sitting at the 4th percentile over the past decade, making it the cheapest sector; Health Care at 20x sits at the 96th percentile; Consumer Staples at 23x ranks at the 92nd percentile.

Goldman Sachs Cross-Asset 12-Month Forecasts (from the same report appendix):

• US 10-Year Treasury Yield: Currently 5.0%, 12-month target 4.5% (-53bps)
• Brent Crude: Currently $111/bbl, 12-month target $75 (-32%)
• COMEX Gold: Currently $4,031/oz, 12-month target $5,140 (+27%)

Capital Flows: Over the past 12 months, US mutual funds and ETFs saw cumulative inflows of approx. $380 billion in equities, $501 billion in money markets, and $839 billion in fixed income.

VIII. Risks & Watchlist

1. Energy Prices: Energy was the second-largest earnings contributor in Q3 and the reason margins were cut across most sectors. Goldman expects Brent to fall to $75 within 12 months. Lower oil prices would weigh on energy profits but aid margin recovery for other sectors, carrying significant structural implications.
2. Interest Rates: The 10Y US Treasury yield sits at 5.0%, with GS forecasting a drop to 4.5%. If rates fail to decline, the space for high-valuation non-tech sectors to continue catching up will be constrained.
3. AI Profit Deceleration: AI infra stocks' earnings growth is expected to slow from 80% to around 40% by late 2027, alongside free cash flow turning negative. If capex guidance begins to come down, this entire chain will be directly impacted.
4. AI Disruption: Fears of disruption in search, software, and related areas are intensifying, with software stocks leading declines this week.
5. Revision Gap: GS's 2027 EPS forecast is approx. 2% below consensus, concentrated in Tech and Comm Services. If consensus converges toward GS's view, these two sectors face the heaviest downward revision pressure.
6. Late Filings: Next week brings earnings from 143 additional companies (accounting for 21% of S&P 500 market cap), with IT comprising 29% of that week's disclosures.

Disclaimer

This article is a summary and analysis by Tide Direction Research of a third-party broker research report (Goldman Sachs, October 30, 2026). The target prices, earnings forecasts, sector allocations, and related judgments cited herein represent the views of the respective broker's analysts, reflect only their institutional stance, do not necessarily align with Tide Direction Research's views, and do not constitute any investment advice.

Markets carry risks, and decisions must be made independently. This article should not serve as the basis for trading any securities.