Earnings beats surge, but market reaction muted: Goldman Sachs

[Among the dollars lies a magnifying glass with the inscription - Earnings Season]
Dzmitry Skazau

The third-quarter earnings season has delivered some of the strongest upside surprises in recent history, but investors have largely shrugged, according to Goldman Sachs strategist David Kostin.

Roughly two-thirds of S&P 500 (SP500 [https://seekingalpha.com/symbol/SP500]) companies have reported results, and 64% have topped earnings estimates by at least one standard deviation. That’s a rate “unprecedented outside of the COVID reopening period,” Kostin said in an October 31 report.

Those beats have come from both higher revenues and stable profit margins, with aggregate sales tracking up 6% year over year and margins at roughly 11.8%.

Still, Kostin noted that markets are underreacting to good news. The median company that beat earnings forecasts outperformed the index by just 0.3 percentage points the next day, well below the historical average.

“Investors view results this quarter as less informative for the forward earnings outlook,” the report said, citing volatility in trade policy, bank lending and other macro forces.

EARNINGS GROWTH SLOWS BUT GUIDANCE HOLDS UP

Despite robust results, overall earnings momentum has cooled. S&P 500 earnings per share are on track to rise 8% year over year, down from 11% in the second quarter, even as companies maintain upbeat guidance. Nearly half of firms offering fourth-quarter forecasts have projected profits above analyst expectations, and Wall Street’s 2026 earnings consensus has been revised higher by 2% to $308.

AI SPENDING AND LABOR EFFICIENCY IN FOCUS

Tech giants continue to drive capital investment in artificial intelligence. Forecasts for 2026 “hyperscaler” capex spending led by Amazon (AMZN [https://seekingalpha.com/symbol/AMZN]), Google (GOOG [https://seekingalpha.com/symbol/GOOG]) (GOOGL [https://seekingalpha.com/symbol/GOOGL]), Meta (META [https://seekingalpha.com/symbol/META]), Microsoft (MSFT [https://seekingalpha.com/symbol/MSFT]) and Oracle (ORCL [https://seekingalpha.com/symbol/ORCL]), have climbed to $518 billion, up 65% since early 2025. Goldman said investors are rewarding AI spending only when paired with strong earnings delivery.

Corporate leaders are also tightening headcount. Seventeen S&P 500 companies have announced layoffs since September, totaling about 82,000 positions, though few are directly linked to AI. Nearly half of companies this quarter have mentioned AI-related productivity gains on their calls.

CREDIT CONDITIONS AND OUTLOOK

Meanwhile, lending to nonbank financial institutions has drawn scrutiny following a handful of loan losses, particularly among regional banks. Goldman analysts see the issues as “idiosyncratic” rather than systemic, noting that such loans make up 13% of U.S. commercial bank lending and that nearly half remain undrawn.

Goldman continues to forecast S&P 500 (SP500 [https://seekingalpha.com/symbol/SP500]) earnings of $262 a share in 2025 and $280 in 2026, with the index ending next year near 6,800 and rising to 7,200 over 12 months.

The 3Q season has showcased strong fundamentals but limited investor enthusiasm, Kostin said, highlighting that markets are rewarding visibility over surprises.

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