Wall Street closed higher on Friday as investors shifted focus to the third-quarter earnings season, with major players like Wells Fargo and Goldman Sachs set to report results. According to Reuters, US corporate earnings are expected to rise about 31% year on year in the third quarter, with technology and AI heavyweights Alphabet, Amazon.com and Meta Platforms accounting for two-thirds of the increase. The S&P 500 gained 46.35 points (0.60%) to end at 7,811.71, while the Nasdaq Composite rose 172.83 points (0.64%) to 27,365.00 and the Dow Jones Industrial Average climbed 429.90 points (0.84%) to 51,661.54. As per The Economic Times, the rally was driven by optimism ahead of major earnings reports, though markets pared earlier gains after crude oil reversed its decline and Treasury yields resumed climbing.
Goldman Sachs Research has set a 12-month target of 8,700 for the S&P 500, representing an upside of approximately 13.5% from the October 2 close of 7,666.45. According to reports from The Financial Express, this forecast is based on earnings growth rather than valuation expansion, with the index currently trading just 13.5% below its all-time high of 7,816.70. The target implies a P/E multiple close to today's 19 times, which matches the 10-year average and is down from 23 times a year ago. The ex-AI index, launched in February to help clients hedge AI exposure, excludes about 45% of the S&P 500 at launch and currently sits 6.4% below its 52-week high of 3,337.19.
Almost half of this year's EPS growth comes from AI investment, with the largest US hyperscalers on track to spend $800 billion on capital expenditure in 2026, representing 94% more than in 2025. According to The Economic Times, AI-linked momentum stocks broadly gained as the US bull market, driven largely by enthusiasm around artificial intelligence, approached its fourth anniversary. As reported by The Financial Express, this AI spending boom has lifted earnings across chipmakers, tech hardware suppliers, industrial firms, and utilities, with second-order effects including increased capital markets activity and rising household wealth supporting consumer spending. The latest chip rally has been particularly strong, with AMD, Marvell, Synopsys, and Cadence Design Systems each gaining 20% or more in about 20 trading days, as reported by CNBC. However, Goldman expects the AI investment boost to gradually fade, with spending growth set to slow as depreciation charges on equipment climb.
Energy earnings are forecast to rise about 115% after US oil prices surged roughly 30% in the third quarter amid the US-Israeli war with Iran, according to Reuters. Technology and AI could account for 70% to 80% of earnings growth, said Sameer Samana, head of global equities and real assets at Wells Fargo Investment Institute. Consumer staples and real estate have some of the weakest growth estimates, as reported by Reuters. The S&P 500 sits 0.3% below its own 52-week high, while Goldman's ex-AI index peaked in August and sits 6.4% below its high, highlighting the divergence between AI-linked and broader market performance. US semiconductor earnings are expected to increase about 136%, compared with about 158% in the second quarter, said Tajinder Dhillon, LSEG's head of earnings and equity research.
Goldman forecasts 11% EPS growth for both 2027 and 2028, with earnings expected at $415 in 2027 and $460 in 2028, driven by solid GDP growth and AI productivity gains. According to The Financial Express, the firm expects AI investment to turn from a tailwind this year into a marginal drag in 2028, while temporary boosts from semiconductor margins and unrealized gains on private company stakes will fade. The biggest long-term question remains whether AI will shift from big spending to real productivity gains, which is crucial for the index to reach the 8,700 target. S&P 500 earnings rose nearly 54% in the second quarter, the fastest growth since 2021, with excluding mark-to-market gains on AI-related investments at Alphabet and Amazon.com, growth was about 35%, also the highest since 2021. Anthony Saglimbene, chief market strategist at Ameriprise Financial, said earnings growth could be approaching its peak for the current cycle, noting that "a lot of this AI trade is built on continued capex spending, and every quarter we go, and they continue to spend, the hurdle rates get higher and the scrutiny gets larger."
