US Stocks' Earnings Growth 'Beats Expectations' This Season; Tech Giants See Dual Rise in 'Capex and AI Returns'

The second-quarter earnings season for the US stock market has been filled with good news, with corporate earnings growth comprehensively exceeding expectations. Meanwhile, hyperscalers, represented by mega-tech companies, have sent positive signals of accelerating returns on AI investments while continuing to increase investment in AI infrastructure, providing fundamental support for the market.

As of July 31, 61% of S&P 500 components had reported their Q2 results. According to news from Zhuifeng Trading Desk, citing Goldman Sachs' strategists' mid-earnings season report, 64% of these companies beat the consensus EPS estimate by at least one standard deviation, reaching one of the highest levels in history. After excluding "other income" from equity investments by tech giants, the tracked year-over-year EPS growth rate for the S&P 500 in Q2 reached 26%, higher than in Q1 and marking the fastest growth since 2021; if the aforementioned income is included, the overall growth rate soared to 45%, far exceeding the previous market consensus expectation of 22%.

At the same time, hyperscalers such as Alphabet, Amazon, and Microsoft disclosed a combined capital expenditure (capex) of $182 billion in Q2, with cloud business revenue growing 48% year-over-year, a significant acceleration from 39% in Q1. Analysts predict that hyperscaler capex will exceed $1 trillion in 2027, an upward revision of over $125 billion from pre-earnings season forecasts, as the scale of AI infrastructure investment continues to expand, driving up external financing needs and sparking high market attention to changes in corporate capital structures.

Proportion of Earnings Beats Hits Record High, but TMT Stocks React Indifferently

The breadth of earnings surprises this season is particularly notable. Among S&P 500 companies that have reported results, 64% beat consensus estimates by more than one standard deviation, a ratio second only to the previous quarter (Q1 2026), Q3 2025, and the period of heavy reopening during the pandemic in 2020–2021.

However, the market's reward reaction to earnings beats has been relatively restrained, with particularly weak performance in the Technology, Media, and Telecom (TMT) sector. In the TMT sector, stocks that beat EPS estimates underperformed the S&P 500 by an average of 192 basis points on the day following the earnings announcement, while non-TMT stocks with similar performance outperformed by an average of 75 basis points. In contrast, over the past two decades, S&P 500 stocks beating estimates have historically outperformed the index by an average of 95 basis points on the day after the announcement, but this figure has narrowed to just 39 basis points this quarter.

Nevertheless, the price and EPS of the equal-weighted S&P 500 index continue to rise in sync, indicating that fundamentals outside the AI complex remain robust, and the market's structural divergence has not affected the overall bull market pattern.

EPS Growth Acceleration Exceeds Expectations, AI Infrastructure Contributes About One-Third of Growth

From the perspective of earnings growth structure, the tracked year-over-year EPS growth rate for the overall S&P 500 in Q2 was 45%, of which 19 percentage points came from approximately $151 billion in "other income" from equity investments by Alphabet and Amazon, with Microsoft contributing another approximately $3 billion. After excluding these one-time items, the growth rate was 26%, still significantly higher than the 20% in Q1.

In terms of individual stock medians, the tracked year-over-year EPS growth rate for the median S&P 500 stock was 12%, also higher than the market consensus expectation of 9% before the earnings season, indicating that the earnings beat was not driven solely by a few giants.

Notably, AI infrastructure-related stocks contributed about one-third of the S&P 500's EPS growth in Q2. According to analyst forecasts, this proportion will further increase to over 50% in the second half of 2026 and in 2027, becoming the core driver of index earnings growth. Alphabet, Amazon, Micron Technology, and Nvidia were the largest contributors to incremental growth in the quarter, with the top ten contributors accounting for 79% of the index's Q2 EPS growth.

2027 Earnings Outlook Revised Upward, Cost Pressure Constitutes Marginal Risk

Strong Q2 results have led analysts to widely revise upward their forward earnings expectations. Since the start of Q3, the bottom-up consensus expectation for S&P 500 EPS in 2027 has been raised by about 1%, with the most significant revisions in the energy and financial sectors. The vast majority of sectors show positive revisions, and the breadth indicator for revisions remains positive.

However, the erosion of profit margins by cost pressure is a key risk currently facing corporate earnings. Over the past few quarters, the net profit margin of the median S&P 500 stock has basically remained flat. While companies have shown some resilience in coping with tariffs and energy price pressures, there has been a general lack of improvement. Among companies that have reported results, the market consensus for profit margins in Q3 has been lowered for most sectors, with the consumer staples sector seeing the largest revision (-53 basis points), and slight downward revisions also occurring in the consumer discretionary, industrial, and materials sectors. The high profit margins of large tech companies have supported the S&P 500's weighted average profit margin to some extent, but this effect has not transmitted to most individual stocks.

Hyperscalers: Surge in Capex, AI Monetization Accelerates

The Q2 earnings reports from hyperscalers have released positive signals of accelerating realization of returns on AI investments. The combined cloud business revenue of Alphabet, Amazon, and Microsoft grew 48% year-over-year, significantly exceeding market expectations and accelerating further from 39% in Q1. Meta's platform revenue grew 28% year-over-year, basically in line with expectations. Analysts currently predict that the collective revenue of the four hyperscalers (Alphabet, Amazon, Meta, Microsoft) will grow at an annualized rate of 18% over the next two years, with expectations being continuously revised upward.

At the same time, the scale of capital expenditure and financing needs have expanded significantly. In Q2, the aforementioned companies (including Oracle) disclosed a combined capex of $182 billion, while free cash flow was only about $5 billion, raising approximately $101 billion through debt and equity financing. Analysts' forecast for hyperscaler capex in 2026 is approximately $793 billion, while the 2027 forecast has jumped from $929 billion before the earnings season to over $1 trillion (a 33% year-over-year increase), and capex is expected to consistently exceed operating cash flow from 2026 to 2028. Goldman Sachs credit strategists expect that related companies will issue about $400 billion in investment-grade bonds globally next year to support the continued expansion of AI infrastructure investment.

Managements of various companies also commented on their financing strategies during earnings conference calls. Alphabet stated that the company has significantly expanded its debt portfolio and recently conducted equity financing to maintain a robust balance sheet; Meta stated that it is evolving its capital structure, increasing the proportion of debt, and expanding long-term capital sources, including cooperation with BlackRock; Amazon stated that it will flexibly evaluate various financing instruments according to business growth needs; and Oracle disclosed plans to raise about $40 billion (including debt and equity) in fiscal year 2027, including the already announced $20 billion immediate equity issuance.

AI Trade Volatility Continues Historical Momentum Rotation Pattern, Outlook Improves After Deleveraging

Over the past week, volatility in AI-related stocks has continued the historical pattern of consolidation commonly seen after sharp rises in momentum factors. According to analysis by Goldman Sachs' strategy team, since 1980, momentum factors have typically experienced a period of adjustment and consolidation after rising more than 20% within three months, and the recent pullback aligns with this historical pattern.

Currently, the three-month realized volatility of Goldman Sachs' long-short momentum factor is at extremely high levels seen in decades (excluding recession periods). However, significant deleveraging by hedge funds and ETF investors recently, along with the continued confirmation of strong fundamentals during the earnings season, point to subsequent rotation volatility likely easing. Goldman Sachs maintains its year-end 2026 target price for the S&P 500 at 8,000 points, with a 2027 EPS forecast of $385. Nvidia, the largest S&P 500 stock by market cap yet to report results, is scheduled to announce its Q2 earnings on August 26, which is expected to bring clearer directional signals to the market.