Goldman Sachs expects the rotational volatility in the S&P 500 to ease in the coming weeks, pointing to a decades-old market pattern and a sharp unwind of hedge fund and ETF leverage. The call lands alongside a Q2 earnings season where index-level growth is far outpacing forecasts, though the gains concentrate in a handful of megacap names while big tech spenders get punished despite beating estimates.
Goldman Sachs said rotational volatility in S&P 500 sectors should ease in the coming weeks, pointing to a decades-old market pattern and a fast unwind of leveraged positions.
History points to calmer trading
The bank's long/short S&P 500 Momentum factor recently hit its highest volatility in decades outside of a recession, matching the pattern that has followed three-month rallies of 20% or more. Goldman identified 11 such episodes since 1980, each followed by a consolidation period similar to the current drawdown. Both the historical pattern and the pace of recent deleveraging among hedge funds and exchange-traded fund holders, the bank said, support an improved outlook.
A concentrated earnings beat
The call comes alongside a Q2 season showing broad strength: S&P 500 earnings per share growth is tracking at 45% year-over-year, beating a consensus estimate of 22% coming into the quarter. The gain leans heavily on a combined $151 billion of "other income" tied to equity investments at Alphabet and Amazon, plus an additional $3 billion at Microsoft.
Excluding those three items, EPS growth stands at 26%, the fastest pace since 2021. So far, 61% of S&P 500 companies have reported Q2 results. Of those, 64% beat consensus EPS forecasts by at least one standard deviation — one of the highest rates on record, trailing only the prior quarter, the third-quarter 2025 season and the COVID-19 reopening period.
AI spending outruns cash flow
Yet the market has punished the biggest spenders despite the beats. The median technology, media and telecom stock that topped estimates lagged the S&P 500 by 192 basis points the day after reporting, versus 75 basis points of outperformance for the median stock elsewhere. Hyperscaler capital expenditure reached $182 billion in Q2 against just $5 billion of free cash flow.
$101 billion of combined debt and equity issuance filled the gap. Analysts now project more than $1 trillion in hyperscaler capex for 2027, with capex projected to exceed operating cash flow through 2028. Cloud revenue at Alphabet, Amazon and Microsoft still grew 48% year-over-year in Q2, accelerating from 39% in the first quarter.
Since the third quarter began, the bottom-up consensus for 2027 S&P 500 earnings has been revised up 1%, with positive revisions across most sectors. Goldman maintained its year-end 2026 S&P 500 price target of 8,000. That implies an 8% return from the July 30 close of 7,438.
Source: Investing.com
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