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Goldman expects Nvidia and Micron to supply a third of S&P 500 earnings growth
S&P 500 stocks hit a record on tech gains as Goldman Sachs forecast that Nvidia and Micron would supply a third of the index's third-quarter earnings growth. That leaves the season's headline growth rate dependent on two chip suppliers.
The Board Room · Leadership desk
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What happened
- Goldman Sachs analysts said AI infrastructure stocks are expected to drive more than half of S&P 500 earnings-per-share growth in the third quarter.
- Nvidia, already the world's largest public company, rose and moved closer to becoming the first company ever worth $6 trillion.
- Third-quarter earnings season begins in earnest next week, when the country's biggest banks report their results.
- The 10-year Treasury yield stayed above 5.29% on Tuesday after long-term yields hit their highest levels since 2002 on Monday.
- Energy was the worst-performing sector as Brent fell below $99 a barrel after a report that a key Saudi pipeline was operating normally.
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Why it matters
- constraint With companies outside AI infrastructure forecast to supply less than half of index earnings growth, the S&P 500's growth rate is a weak yardstick for budgets and pay plans in other sectors.
- exposure Index-fund holders and employees paid in index-linked stock are more exposed to two chipmakers' quarterly results than a broad index name suggests.
- decision Boards timing buybacks or equity raises off a record index are pricing against a forecast concentrated in two suppliers, at borrowing costs not seen since 2002.
Goldman's two forecasts, taken together, leave the rest of the market a minority share of the quarter's growth. If AI infrastructure stocks supply more than half of index earnings growth [6] and Nvidia and Micron a third [7], the two chipmakers account for up to two-thirds of the AI infrastructure share [15]. Every company outside AI infrastructure, combined, is left with less than half [16].
Expectations going in are higher than usual. "Heading into the start of the earnings season, analysts and companies have been more optimistic than normal in their earnings outlooks for the third quarter," FactSet senior earnings analyst John Butters said [5]. With a third of the forecast growth sitting in two companies [7], a shortfall at either moves the index's growth figure more than a miss almost anywhere else. The report does not give the expected growth rate or any valuation measure, so how much disappointment the record already allows for cannot be measured from it.
Sequence matters here. The banks that open the season next week [4] sit outside the group Goldman expects to drive most of the growth [6]. A strong first week would therefore say little about the part of the forecast that depends on chips.
Tuesday's breadth was modest. The Russell 2000 index of small and mid-size companies rose 0.5% in early trading [8], but NBC News reported that the S&P 500 and Nasdaq gains were overwhelmingly powered by tech companies such as Marvell, Palo Alto Networks and Dell Technologies [2].
The case for lower rates rests on a political calendar. "Several forces suggest rates may peak within the next month," Apollo's Torsten Slok said [12]. "Approaching midterm elections raise the odds of a Middle East deal that would lower oil prices," he said [13]. President Donald Trump has said a deal to end the 7-month war with Iran could come "right after" the midterms [14]. ING's commodities analysts were warier, saying "the market remains nervous about potential supply disruptions from the region" [10].
For an operator, the trade-off this quarter is between two readings of one record. The first treats it as a sign of broad corporate strength. The second treats it as a bet on two chip suppliers, made while long-term yields sit near their highest since 2002 [11] and rate relief waits on an oil deal [13]. I think the second fits the evidence better. A budget or pay plan pegged to S&P 500 earnings growth takes a third of its target from two firms [7]. If Nvidia or Micron falls short, the index's growth figure drops even when the companies supplying the other two-thirds [17] deliver what analysts expected, and a plan pegged to that figure misses with it.
What to watch
- Nvidia's and Micron's third-quarter results against Goldman's forecast that the pair supply a third of S&P 500 earnings growth.
- Whether the 10-year Treasury yield peaks within the month, as Apollo's Torsten Slok expects, or sets new highs above its 2002-level peak.
- Progress toward the US-Iran deal that Trump has tied to the end of the midterm elections.