Goldman Sachs noted that both the historical pattern and the pace of recent position reductions suggest an improving outlook.
Goldman Sachs reported that its S&P 500 Momentum long/short ratio recently reached its highest volatility in decades outside of a recession, consistent with the historical pattern following three-month rallies of 20% or more. A sharp reduction in positions among hedge funds and ETF holders points to a reduction in rotational shocks in the coming weeks.
The bank has identified 11 such episodes since 1980, each followed by a period of consolidation similar to the current drawdown.
The estimate was released alongside an interim update to second-quarter results, demonstrating broad market strength.
S&P 500 earnings per share growth in the second quarter is 45% year-over-year, exceeding the consensus estimate of 22% at the beginning of the quarter. This was largely due to a combined $151 billion in "other income" related to investments in shares of internet giant Alphabet Inc. and e-commerce company Amazon.com Inc.
Software maker Microsoft Corp. contributed an additional $3 billion in such income. Excluding these three items, earnings per share growth was 26%—the fastest pace since 2021 and an acceleration from the first quarter.
Of the 61% of S&P 500 companies that reported second-quarter results, 64% beat consensus earnings per share estimates by at least one standard deviation—one of the highest on record, behind only the previous quarter, the third-quarter 2025 earnings season, and the post-COVID-19 recovery period.
Despite the broad beat, the reaction among technology, media, and telecom stocks was muted. The median TMT stock that beat earnings estimates lagged the S&P 500 by 192 basis points the day after the earnings release, while the median stock in other sectors outperformed the index by 75 basis points.
Capital expenditures at the largest cloud providers (hyperscalers) reached $182 billion in the second quarter, with free cash flow of just $5 billion, a gap covered by a combined $101 billion in debt and equity issuance.
Analyst forecasts now point to hyperscalers' capital expenditures exceeding $1 trillion in 2027—more than $100 billion higher than estimates prior to the start of the quarter—with capital expenditures projected to exceed operating cash flow through 2028. Cloud revenue from Alphabet, Amazon, and Microsoft grew 48% year-over-year in the second quarter, accelerating from 39% in the first quarter.
Since the start of the third quarter, the consensus S&P 500 earnings per share (EPS) forecast for 2027 has been revised upward by 1%, with positive revisions across most sectors. Goldman maintained its 2026 S&P 500 target of 8,000, implying a return of 8% from the July 30, 2025, closing price of 7,438.