The second quarter report is coming, AI stocks are facing the "Financial Olympics", the cost of falling short of expectations is heavy

As the second quarter earnings season of the US stock market approaches, Wall Street investors are holding their breath, with Goldman Sachs warning that tech giants face a "severe profit test" this earnings season.

Currently, the market generally expects a significant surge in earnings for the S&P 500 component stocks in the second quarter, with a year-on-year growth rate of 9%, the highest growth rate since the fourth quarter of 2021. It is worth noting that this expectation contrasts sharply with the previous few quarters, where earnings growth expectations were basically flat for the past three quarters, and even negative growth in the three quarters before that.

Goldman Sachs likened the high earnings expectations threshold in its latest report to the "financial Olympics".

Goldman Sachs' chief equity strategist Kostin warned that such optimistic expectations may be difficult to achieve. In the past six months, analysts have only lowered earnings expectations by 1%, much lower than the previous 7% decline. This means that it will be more difficult for companies to exceed expectations as usual.

Undoubtedly, the "earnings game" will once again be led by mega-cap AI stocks, with analysts expecting revenue for six giants like NVIDIA in the second quarter to grow by 17% year-on-year, and earnings to grow by 30%. High profit forecasts mean that even a "small incident" could make the overall US stock market less optimistic.

High Expectations for AI Stocks

As the earnings season approaches, the market's focus will be on tech giants. Their performance not only affects their own stock prices, but may also influence the direction of the entire market.

The market has high hopes for AI tech giants, with analysts expecting the second-quarter earnings of six major tech giants including Amazon, Apple, Google parent company Alphabet, Meta, Microsoft, and NVIDIA to grow by 30% year-on-year, far higher than the 5% growth of the other 494 companies.

However, Goldman Sachs believes:

The revenue growth of Meta, Microsoft, NVIDIA, Google, and Amazon, among others, will slow down from 22% in the first quarter to 17% in the second quarter, further slowing to 15% and 14% in the third and fourth quarters, respectively, and the net profit margins of the first four will also shrink.

Specifically, NVIDIA's revenue is expected to slow down from 262% in the first quarter to 110% in the second quarter, 72% in the third quarter, and 55% in the fourth quarter.

Goldman Sachs further warns:

These tech giants are already at extremely high valuations. For example, the market-to-sales (EV/Sales) ratio of the top five AI tech stocks has reached 8 times, far higher than the median of 3 times for S&P 500 component stocks.

Historical data shows that high-valued growth stocks often face greater downside risks if they fail to meet expectations. Specifically, over the past 15 years, companies with a market-to-sales ratio exceeding 8 times have typically underperformed the median stock in the Russell 3000 index by 32% if they fail to meet sales expectations. In contrast, the performance of undervalued companies when expectations are not met is much better Overall, Goldman Sachs believes that the strong upward trend in the first half of the year may be difficult to sustain unless AI giants' profits continue to exceed already optimistic expectations