'Exceptionally strong' U.S. earnings the driving force behind stock market rally

Investing.com -- First-quarter earnings have come in “exceptionally strong,” providing the primary fuel behind the U.S. stock market's recent rally even as elevated energy prices and geopolitical uncertainty cloud the outlook, according to Goldman Sachs.

With 63% of S&P 500 companies having reported, analyst Ben Snider said results are tracking at 16% earnings-per-share growth excluding one-time items, with companies recording the lowest frequency of EPS misses in 25 years outside of the COVID reopening period.

The aggregate S&P 500 EPS growth rate stands at 25%, though Goldman noted that figure is distorted by idiosyncratic one-time benefits.

Snider notes that mega-cap technology has been a standout, with Amazon, Alphabet, Meta and Microsoft collectively reporting revenue growth of 20% and earnings growth of 61%. He added that investor focus has remained squarely on revenue as a gauge of return on AI investment.

The AI capital expenditure boom is also lifting the broader earnings outlook. "Analyst estimates for 2026 AI hyperscaler capex spending now total $751 billion, $80 billion above estimates at the start of the earnings season and 83% above spending in 2025," Snider wrote.

He believes the surge is driving upward earnings revisions for AI infrastructure companies and skewing risks to its S&P 500 EPS estimates to the upside.

Despite the strong backdrop, Goldman flagged that analyst margin estimates for most sectors have been trimmed amid commodity input cost pressures, and that the reward for earnings beats has been unusually small this season.

Positioning has also become elevated, with Goldman's U.S. Equity Sentiment Indicator rising to 1.7, a level historically associated with below-average returns over the subsequent two to eight weeks.

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