Key Takeaways:
Wall Street enters the final trading day of the second quarter near record highs, with the Nasdaq 100 testing a key resistance level and artificial intelligence spending facing its most consequential earnings scrutiny of the year.
The S&P 500 traded near 7,365 on Tuesday, near its record, as investors weighed quarter-end positioning against a Q2 earnings season that will test whether AI profit growth can justify elevated valuations.
"Continued earnings growth should drive continued equity market upside," said Ben Snider, chief U.S. equity strategist at Goldman Sachs, which raised its year-end S&P 500 target to 8,000 from 7,600 in late May.
The benchmark index has gained 24% over the past year, with Goldman estimating S&P 500 earnings per share of $340 for 2026, representing 24% year-over-year growth. Q2 earnings are expected to rise 22%, up from 18.7% at the start of the quarter, with revenue growth of 12.1% — the strongest pace since the second quarter of 2022. The Nasdaq 100, meanwhile, is testing a resistance level after a five-day slide that flashed technical warning signs.
The stakes are unusually high. Companies that miss Q2 estimates have been punished with an average 4.2% decline, compared with a historical average of 2.9%, according to Goldman. With the S&P 500 trading at roughly 21 times forward earnings — a level higher than about 87% of observations over the past 40 years — the market has little room for disappointment.
AI Capex as the Earnings Engine
Goldman estimates that AI infrastructure investment will account for roughly half of all S&P 500 earnings growth in 2026. 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.
"Analysts have been too conservative during each of the past three years," Snider said, pointing to upside risk to consensus capex estimates for 2027.
Goldman's basket of stocks tied to AI data center construction has returned nearly 60% year-to-date. Semiconductor companies are the primary direct beneficiaries, while tech hardware, industrials, and utilities are also absorbing meaningful earnings boosts from the AI buildout.
Concentration Risk and Valuation
The rally's narrow leadership remains a concern. The seven largest technology stocks — Nvidia, Apple, Alphabet, Microsoft, Amazon, Broadcom, and Meta — posted a collective return on equity of 44%, up nine percentage points over the past three years. Goldman estimates their ROE will fall by an average of 700 basis points next year as depreciation at hyperscalers increases and asset intensity rises.
The U.S. 10-year Treasury yield has remained relatively stable, and the dollar index has held recent ranges, providing a supportive cross-asset backdrop for equities. Goldman identified 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 is that neither scenario plays out through year-end.
Snider recommends secular growth companies and businesses tied to power infrastructure investment, advising selectivity within the Magnificent Seven rather than broad exposure to the group. The bank is also looking at AI infrastructure plays beyond chips, including data governance, cybersecurity, and robotics.
Q2 earnings season begins in mid-July, when major banks start reporting. The results will determine whether the S&P 500 can reach Goldman's 8,000 target, implying roughly 9% additional upside from current levels.
This article is for informational purposes only and does not constitute investment advice.
