S&P 500 earnings growth to slow as AI spending loses momentum, Goldman Sachs says

Wall Street's corporate earnings machine is still running at an impressive pace, but Goldman Sachs warns that investors may need to adjust their expectations as profit growth slows, artificial intelligence spending begins to mature and market leadership shifts away from technology giants.

In an Oct. 30 research report, Goldman Sachs strategist Ben Snider and his team said third-quarter earnings results underscore a growing challenge for equity investors: Corporate profits remain exceptionally strong, but the acceleration that helped drive stocks higher is coming to an end.

With 60% of S&P 500 (SP500) companies having reported results, earnings per share are on track to rise 33% from a year earlier. That matches the second quarter's growth rate and represents one of the strongest performances in recent decades outside of economic recoveries following recessions.

Yet Goldman Sachs expects that momentum to moderate significantly.

Excluding nonrecurring items, the firm forecasts S&P 500 (SP500) earnings growth of nearly 30% in 2026, slowing to approximately 18% in 2027.

The deceleration doesn't necessarily signal an approaching bear market. Goldman Sachs still expects the S&P 500 to deliver its fourth consecutive year of double-digit returns in 2026, supported by an improving earnings outlook.

The bigger question is whether investors have already priced in too much good news, particularly among the technology companies that have dominated the market.

Strong earnings, but a higher bar

Corporate America continues to outperform Wall Street's earnings expectations, although the magnitude of those surprises is diminishing.

About 60% of S&P 500 (SP500) companies have reported earnings exceeding consensus forecasts by more than one standard deviation, compared with a historical average of 50%. That figure, however, is below the 64% average recorded during the preceding four quarters.

The median S&P 500 company is reporting earnings growth of 12%, down from 14% in the second quarter but still comfortably above the 10-year median of 8%.

Revenue growth has also moderated, even as profit margins have reached record levels.

The technology and communications sectors remain the principal engines of earnings expansion, accounting for more than 60% of aggregate S&P 500 earnings growth in the third quarter. Energy contributed another 20%.

The differences among sectors are striking. Energy companies are reporting aggregate earnings growth of 138%, followed by information technology at 67%, communication services at 46% and materials at 39%.

Consumer staples companies, meanwhile, are delivering just 2% earnings growth.

Analysts are still raising their forecasts for next year, with consensus S&P 500 earnings estimates for 2027 increasing 2% since the reporting season began.

However, the breadth of those revisions is narrowing. Positive earnings revisions now outnumber negative revisions in only about half of S&P 500 (SP500) sectors.

Rising input costs, including energy prices, are also prompting analysts to reduce profit-margin forecasts for many companies.

That creates another challenge for investors: Companies may continue generating higher revenues without necessarily converting those sales into the profit growth markets have come to expect.

AI spending is still booming, but growth is peaking

Perhaps the most consequential finding concerns the enormous capital expenditures supporting the artificial intelligence industry.

Goldman Sachs estimates that major hyperscale technology companies will spend approximately $800 billion on capital expenditures in 2026, nearly doubling the previous year's total.

Spending is projected to climb another 44% to roughly $1.2 trillion in 2027.

Those figures suggest that the AI infrastructure boom remains far from over. However, the growth rate is expected to slow considerably, and Wall Street has largely stopped raising its spending forecasts.

Unlike previous earnings seasons, when announcements by major technology companies repeatedly pushed capital expenditure expectations higher, estimates remained relatively stable following the latest results.

For semiconductor manufacturers, power suppliers and other companies supporting AI infrastructure, that distinction could have important implications.

Goldman Sachs estimates that earnings growth among AI infrastructure companies will reach approximately 80% in the third quarter, more than five times the 15% growth rate for the rest of the S&P 500.

Consensus forecasts suggest that growth will slow to roughly 40% by late 2027.

Although 40% earnings growth would remain extraordinary by most historical standards, investors accustomed to accelerating demand and frequent upward earnings revisions may be less enthusiastic.

The concern isn't necessarily that AI infrastructure spending will decline. Rather, companies may struggle to maintain the exceptional growth rates embedded in their stock valuations.

Hyperscalers face cash flow squeeze

The enormous cost of building AI infrastructure is also beginning to show up in the financial statements of the companies financing it.

Goldman Sachs found that the major hyperscalers collectively generated negative free cash flow during the third quarter.

The group, comprising Amazon (AMZN), Alphabet (GOOG)(GOOGL), Meta Platforms (META), Microsoft (MSFT) and Oracle (ORCL), recorded approximately $31 billion in negative free cash flow.

Capital expenditures have grown large enough to exceed their combined operating cash flow.

Analysts expect the group's free cash flow to deteriorate further in 2027 before returning to positive territory in 2028.

That development raises questions about the financial returns on the AI industry's massive investments, particularly if capital spending continues to expand faster than the revenues it generates.

For investors, free cash flow could become an increasingly important measure of whether the AI boom is creating sustainable economic value.

Cloud revenue growth encouraging

Despite those concerns, Goldman Sachs identified encouraging signs that AI investments are beginning to produce meaningful commercial returns.

Combined cloud revenue growth for Amazon (AMZN), Alphabet (GOOG)(GOOGL) and Microsoft (MSFT) accelerated to 54% year over year in the third quarter, up from 48% in the second quarter.

The acceleration suggests that demand for cloud computing and AI-related services remains robust. Cloud providers have also accumulated substantial revenue backlogs, reflecting contracted business that could support future growth.

However, backlog growth slowed modestly from the second quarter. And strong operating performance hasn't necessarily translated into strong stock-market performance.

Goldman Sachs noted that elevated investor expectations and concentrated hedge fund positioning ahead of earnings reports created an unusually demanding environment for technology stocks.

Even impressive results can disappoint when investors expect something better.

The report also highlights the emerging risk of AI disruption to established technology businesses, including potential pressure on search traffic and other digital services.

Goldman Sachs analysts pointed to disappointing Alphabet search revenue and declining search referral traffic to Reddit as examples of the changing competitive environment.

The implication is that artificial intelligence could simultaneously create enormous new revenue opportunities while threatening existing business models.

Market leadership broadens beyond AI

One of the report's most striking findings is that the stock market has become healthier beneath the surface even as the headline S&P 500 (SP500) index has declined.

Since the third-quarter earnings season began, approximately 70% of S&P 500 (SP500) companies have generated positive returns. However, those companies represent only about half the index's market capitalization.

The S&P 500 (SP500) has fallen 3% during the period, while the index excluding AI-related companies has climbed 5%.

S&P 500 Q3 2026 earnings growth by sector
excludes mega-cap tech "other income"
Q3 2026 realized and consensus growth (y/y)
Sector	EPS growth	Sales growth	Margin change	Median stock EPS growth
Energy	138%	25%	736 bp	51%
Info Tech	67	43	454	33
Comm Services	46	15	-75	34
Materials	39	13	232	6
Industrials	23	14	81	14
Real Estate	18	NM	NM	4
Consumer Discretionary	16	3	-16	6
Utilities	11	NM	NM	10
Health Care	4	3	5	9
Financials	4	NM	NM	10
Consumer Staples	2	5	-19	7
S&P 500	33%			12%
ex. Financials and Utilities	43	14%	238 bp	14
Source: FactSet, Goldman Sachs Global Investment Research

Goldman Sachs describes the shift as a simultaneous “catch up” and “catch down.” Stocks that previously lagged the technology-led rally are advancing, while some of the market's largest AI-related companies are retreating.

The rotation is also visible in how investors are rewarding earnings surprises.

The median company beating earnings expectations has outperformed the S&P 500 (SP500) by approximately 1.5 percentage points on the following trading day, an unusually strong response by historical standards.

But the rewards have varied dramatically by sector. Industrial companies (XLI) beating earnings forecasts have outperformed the index by a median 3.71 percentage points, while consumer discretionary companies have outperformed by 3.26 points.

Materials companies (XLB) have also benefited, posting median excess returns of 2.04 percentage points. Technology companies, by contrast, have underperformed the S&P 500 by 0.60 percentage points following earnings beats.

Communication services (XLC) companies have fared even worse, underperforming by 4.19 percentage points.

The divergence suggests that investors are increasingly willing to reward earnings improvements outside the technology sector while demanding more from the companies that previously led the market higher.

What investors should watch next

The report suggests that investors should pay particular attention to the trajectory of earnings revisions, profit margins and AI infrastructure spending rather than simply focusing on whether companies beat quarterly expectations.

The outlook for energy prices and interest rates will also be important in determining whether the rally in nontechnology stocks can continue.

Rising energy costs could pressure corporate margins, while higher interest rates could undermine valuations and make it harder for economically sensitive companies to sustain their recent gains.

For AI-related stocks, the central issue may be whether continued revenue growth can justify enormous capital expenditures and demanding valuations.

The broader market, meanwhile, could benefit if earnings growth spreads more evenly across sectors and reduces dependence on a relatively small group of technology companies.

Goldman Sachs' findings point to a market entering a different phase of the earnings cycle. Corporate profits remain strong, AI investment continues at a historic scale and analysts are still raising their forecasts.

But the era in which accelerating growth and repeated positive surprises could reliably propel the largest technology stocks higher may be drawing to a close. For investors, the distinction between strong growth and accelerating growth could become increasingly important.