Key Takeaways:
US corporate profits reached a fresh record in the second quarter, extending a streak of margin expansion that has redirected capital toward earnings-focused ETFs.
US corporate profits climbed to a record high in the second quarter, extending a streak of margin expansion that has made earnings-focused exchange-traded funds a growing focus for investors. The S&P 500's gains over the past year have been driven almost entirely by earnings growth rather than multiple expansion, according to Goldman Sachs Research.
"The earnings delivery has been the structural backbone of this market, and the data confirms margins are still expanding," said Ben Snider, chief US equity strategist at Goldman Sachs. "Continued earnings growth should drive continued equity market upside."
Goldman Sachs projects S&P 500 earnings per share of $340 for 2026, representing 24% year-over-year growth, with a further increase to $385 forecast for 2027. FactSet data shows Q2 earnings growth running at 22%, up from 18.7% at the start of the quarter, while revenue growth of 12.1% marks the strongest pace since Q2 2022. The bank raised its year-end S&P 500 target to 8,000 from 7,600 in May, implying roughly 9% additional upside from current levels near 7,365.
The sustained profit growth has redirected capital toward ETFs that screen for earnings power. The WisdomTree Earnings 500 Fund (EPS), the Invesco S&P 500 High Quality Earnings ETF (EZM), and the Invesco S&P 500 Earnings Strength ETF (EES) have each attracted inflows as investors seek exposure to companies with proven profitability rather than speculative growth. These funds prioritize companies with positive trailing earnings and sustainable profit margins, a factor that has outperformed broad market benchmarks during the current cycle.
AI infrastructure investment is the single largest driver of the earnings expansion, accounting for roughly half of all S&P 500 earnings growth in 2026, Goldman Sachs Research confirmed. The largest hyperscale technology companies are projected to spend approximately $754 billion on capital expenditure this year, an 83% increase from 2025, with that figure expected to reach $905 billion in 2027. Semiconductor companies are the primary direct beneficiaries, while tech hardware, industrials, and utilities are also absorbing meaningful earnings boosts from the AI buildout.
The risk to the outlook centers on valuation and concentration. The S&P 500 trades at roughly 21 times forward earnings, a level higher than approximately 87% of observations over the past 40 years. Snider acknowledged the valuation but argued that near-record corporate profitability and relatively low interest rates justify the multiple. Companies that miss Q2 estimates are being punished more severely than historical norms, with misses sending stocks down an average of 4.2% compared with a historical average of 2.9%, signaling limited tolerance for disappointment at current levels.
The earnings data needed to sustain the rally starts arriving in mid-July, when major US banks begin reporting Q2 results. Goldman Sachs identifies a sustained rise in bond yields or a sharp pullback in AI capital spending as the two clearest signals that the rally's foundation is cracking, though its base case assumes neither scenario materializes through year-end.
This article is for informational purposes only and does not constitute investment advice.
