S&P 500 faces Q2 earnings test with 25% AI-driven profit growth

S&P 500 companies face a 22% to 25% earnings growth test this quarter, with AI infrastructure spending driving nearly 60% of the projected gain.

"The upcoming second-quarter earnings season will be a critical test for U.S. stocks after corporate profit growth drove essentially all of the S&P 500's gains over the past year," Goldman Sachs strategist Ben Snider said.

Goldman projects 24% year-over-year earnings growth for the index, with expected EPS of $340 for 2026 and $385 for 2027. About half of that expansion traces directly to AI infrastructure spending, the bank said. Cloud providers could collectively spend $670 billion on capital expenditures in 2026, up sharply from earlier estimates. Micron Technology Inc. and Nvidia Corp. alone are expected to contribute more than 40% of Q2 earnings growth, while the information technology sector may post 60% growth.

The high bar raises the stakes for the July 14 earnings kickoff, when JPMorgan Chase & Co., Goldman Sachs Group Inc. and Citigroup Inc. report. A broad beat could push the S&P 500 toward Goldman's 8,000 year-end target, while a miss — particularly in semiconductors — risks a sharp repricing. The Federal Reserve's July 28 rate decision adds another layer, with traders now pricing in at least one quarter-point hike this year, a sharp reversal from the two to three cuts expected in January.

Profit Forecasts Double as AI Capex Accelerates

Goldman's 24% growth projection is double its earlier 12% estimate, reflecting the speed at which AI-related capital spending has reshaped corporate profit expectations. In Q1, S&P 500 earnings grew roughly 28% year over year, with 85% of companies beating estimates, according to BloFin Research. The upward revision cycle is the strongest since the post-Covid recovery, with forward earnings expectations rising nearly 20% over the past six months, Bloomberg data shows.

Rising Costs and Rate Risks Test Margins

The bullish outlook faces headwinds from higher input costs and a shifting rate environment. Energy prices and supply-chain pressures are putting flat margin forecasts at risk, with analysts lowering margin expectations for many firms. The shift from expected rate cuts to potential rate increases tightens financing conditions for the capital-intensive AI buildout. Pictet Asset Management strategist Arun Sai described the current cycle as "the strongest earnings revision cycle since the commodity super cycle," but cautioned that elevated expectations leave limited room for error.

The Q2 earnings season will determine whether AI-driven profit growth can sustain the S&P 500's rally or if elevated expectations have outpaced reality. Investors will focus on semiconductor guidance and cloud provider capex plans as the clearest signals of whether the AI investment cycle still has room to accelerate.

This article is for informational purposes only and does not constitute investment advice.