Goldman Sachs says the long/short S&P 500 Momentum factor has recently reached volatility not seen in decades outside a recession, aligning with historical patterns that follow sharp three-month rallies. The bank identified that such momentum spikes have accompanied prior runs where the index rallied 20% or more over three months. In examining similar episodes since 1980, Goldman found 11 instances and observed that each instance was followed by a period of consolidation reminiscent of the current drawdown.
Goldman frames the present situation as one in which rapid deleveraging among hedge funds and exchange-traded fund holders is compressing the sources of rotational volatility - a dynamic the firm believes will likely lead to reduced churn in market leadership in coming weeks. That assessment was released alongside a mid-season update on results from the second-quarter earnings cycle, which Goldman describes as broadly strong.
On the earnings front, S&P 500 earnings per share growth is tracking at 45% year-over-year in Q2, well above the consensus estimate of 22% that was in place entering the quarter. A substantial portion of that outperformance is attributable to a combined $151 billion of "other income" tied to equity investments at Alphabet Inc. and Amazon.com Inc., with Microsoft Corp. contributing an additional $3 billion of similar income. When those three items are excluded, EPS growth for the index is 26%, the fastest reported pace since 2021 and an acceleration from the first quarter.
Of the roughly 61% of S&P 500 constituents that have reported Q2 results, about 64% surpassed consensus EPS forecasts by at least one standard deviation. Goldman notes that this beat rate is among the highest on record, exceeded only by the prior quarter, the third-quarter 2025 reporting season and the COVID-19 reopening period.
Despite the overall high rate of upside surprises, the market reaction among technology, media and telecom companies has been relatively muted. Goldman highlights that the median TMT firm that beat EPS estimates underperformed the S&P 500 by 192 basis points on the day after reporting, compared with 75 basis points of outperformance for the median reporting company in other sectors.
Capital spending among the largest cloud providers has accelerated. Goldman reports hyperscaler capex of $182 billion in Q2, accompanied by only $5 billion of free cash flow in the same period. To cover the gap, the hyperscalers issued a combined $101 billion of debt and equity. Analyst forecasts referenced by Goldman now point to more than $1 trillion of hyperscaler capital expenditure in 2027, which the firm notes is more than $100 billion above estimates that existed heading into the quarter. Goldman also projects hyperscaler capex to exceed cash flow from operations through 2028. Cloud revenue growth at Alphabet, Amazon and Microsoft accelerated to 48% year-over-year in Q2, up from 39% in the first quarter.
Since the start of the third quarter, the bottom-up consensus estimate for S&P 500 2027 EPS has been revised up by 1%, with positive revisions across most sectors, according to Goldman. The firm reaffirmed its year-end 2026 S&P 500 price target of 8,000, which implies an 8% return from the July 30 close of 7,438.
Market context
Goldman’s volatility read and the pace of reported deleveraging suggest a transition from active rotation to a more consolidated market structure in the near term. At the same time, strong headline EPS growth in Q2 masks concentration effects from large "other income" items at a few megacap firms and a significant increase in hyperscaler capex, both of which shape forward-looking cash flow and funding profiles.
What this affects
Equity markets broadly - reflected in the S&P 500 - are central to Goldman’s assessment. Technology, media and telecom sectors are highlighted as showing muted stock reactions despite strong relative beats, while hyperscalers and cloud-related businesses are central to capex and cash-flow dynamics.