Global equities rose ahead of the second-quarter earnings season, but momentum trades sharply reversed

Overview

This report is Goldman Sachs Global Weekly Kickstart, focusing on the state of global equity markets ahead of the second-quarter earnings season. It notes that global equities rose approximately 2% last week, with Europe outperforming and Asia lagging; meanwhile, momentum trades experienced a notable pullback as investors rotated from recent winners into lagging assets. With earnings expectations, earnings revisions, and market sentiment all at relatively positive levels, the upcoming second-quarter earnings season will be the key test of whether current elevated valuations are justified.

Core views

The core view is that global equity markets remain supported by earnings expectations in the short term, but the quality of the rally is challenged by concentration. In the US, S&P 500 second-quarter EPS is expected to grow 22% year over year, but AI infrastructure companies are expected to contribute nearly 60% of the growth, requiring the market to see AI spending translate into tangible returns. In Europe, STOXX 600 first-half EPS is expected to grow 11%, but growth is concentrated in energy and commodity-related sectors, falling to 6% excluding commodity producers. The sharp reversal in momentum indicates rising crowded-trade risk, and earnings-season performance will influence market views on elevated valuations and style rotation.

Analysis framework

The report applies a global top-down strategy framework, combining major equity indices, sector performance, earnings growth, earnings revisions, valuation, style factors, fund flows, risk appetite, volatility, and cross-asset correlations to compare global markets. It also lists this week's macroeconomic calendar, including the US ISM services index, FOMC minutes, European industrial and inflation data, Japanese wage and price data, and China credit, inflation, GDP, exports, and central-bank events in Asia ex-Japan.

Methodology notes

• Market PerformanceComparison of MSCI Global and Regional Indices

  Uses MSCI indices and major local indices to measure short-term and year-to-date performance across regions, sectors, and styles.

  The report compares one-week price returns, year-to-date returns, and one-year returns to assess relative strength across global markets, combined with sector and style performance to identify the direction of fund rotation.

• Earnings AnalysisTop-Down and Consensus EPS Growth

  Compares Goldman Sachs' top-down forecasts with market bottom-up consensus expectations to assess the breadth and concentration of earnings growth.

  US earnings growth is described as highly dependent on AI infrastructure companies, while European earnings growth is more concentrated among energy and commodity producers.

• Risk SentimentGS Bull/Bear Market Indicator and Risk Appetite Indicator

  Uses multiple macroeconomic, market, and cross-asset variables to measure the level of risk appetite and market sentiment.

  The report presents sentiment indicator percentiles, the GS Bull/Bear Indicator, and the Risk Appetite Indicator to assess whether the market is overheated, vulnerable, or still supported.

• Style FactorsMomentum vs. Market, Value vs. Growth, Small vs. Large, Cyclicals vs. Defensives

  Assesses the performance and valuation of different style factors through relative price performance and forward P/E premiums.

  The sharp pullback in momentum relative to the market is a key observation in this report, highlighting the need to monitor crowded trades and style rotation.

Asset mapping & comparison

Structured mapping from thesis to named assets (strengths, weaknesses, peers, risks).

• Global equities

  Core asset covered by the report

  Strengths

  Rose approximately 2% overall last week, with positive earnings revisions and sentiment indicators.

  Weaknesses

  Valuations are elevated, and the market needs the earnings season to validate earnings delivery.

  Comparison

  Europe led, while Asia lagged relatively.

  Risks

  If earnings fail to support expectations, valuation declines and style rotation could intensify.

• US equities/S&P 500

  Key focus of the earnings season

  Strengths

  Second-quarter consensus EPS is expected to grow 22% year over year.

  Weaknesses

  Growth is highly concentrated in AI infrastructure companies, while median-stock EPS growth is only 9%.

  Comparison

  Overall index growth is significantly higher than median-stock growth, indicating a large contribution from leading companies.

  Risks

  If AI spending fails to produce visible returns, confidence in elevated valuations could weaken.

• European equities/STOXX 600

  Regional allocation and earnings-validation focus

  Strengths

  First-half consensus EPS is expected to grow 11%, and European markets led last week's gains.

  Weaknesses

  Earnings growth is concentrated in energy and commodity-related sectors.

  Comparison

  EPS growth falls to 6% excluding commodity producers.

  Risks

  If manufacturing improvement is insufficient or currency support is limited, earnings expansion into non-commodity sectors may disappoint.

• Momentum factor

  Core theme of the report title and style rotation

  Strengths

  Previously benefited from recent winners and trend-continuation trades.

  Weaknesses

  Experienced sharp selling last week, indicating crowded positioning and rotation pressure.

  Comparison

  Funds rotated from recent winners into lagging assets, weighing on momentum relative to the market.

  Risks

  If the earnings season triggers further de-crowding, momentum strategies may remain volatile.

• AI infrastructure-related companies

  Important contributor to US earnings growth

  Strengths

  Expected to contribute nearly 60% of total S&P 500 second-quarter EPS growth.

  Weaknesses

  High concentration of earnings contribution increases market dependence on a small number of sectors.

  Comparison

  Their contribution to index EPS growth is significantly higher than that of ordinary constituents.

  Risks

  Investors will focus on whether AI spending translates into real earnings; insufficient delivery could trigger valuation pressure.

• Emerging-market and developed-market equity funds

  Focus of fund-flow and relative-valuation analysis

  Strengths

  The report tracks global investor inflows into DM and EM equity funds and cumulative fund flows.

  Weaknesses

  Fund flows and relative valuations may diverge across regions.

  Comparison

  The report separately compares EM and DM earnings sentiment, valuation, and fund flows.

  Risks

  Changes in the dollar, interest rates, risk appetite, and regional earnings revisions could affect relative performance.

Key data

• Global equity performance last weekApproximately +2%The report states that global equities rose 2% last week, led by Europe, while Asia underperformed relatively.
• S&P 500 second-quarter EPS growth expectationYear-over-year +22%Consensus expectations indicate strong growth, but AI infrastructure companies are expected to contribute nearly 60% of total EPS growth.
• Median S&P 500 stock EPS growth expectationYear-over-year +9%The median growth rate is below the overall index growth rate, indicating high concentration in earnings growth.
• STOXX 600 first-half EPS growth expectation+11%Consensus expectations indicate strong European earnings growth, but growth is concentrated in the energy sector.
• European EPS growth excluding commodity producers+6%Excluding commodity producers, European earnings growth is broadly in line with that of median stocks.
• Goldman Sachs EUR/USD forecast adjustmentLowered from 1.20 to 1.12The report notes that Goldman Sachs FX strategists revised their EUR/USD forecast; a weaker euro could affect support for European earnings.
• Taiwan TWSE one-week local-currency return+5.0%The table shows Taiwan as one of the strongest local indices among the listed markets over one week.
• Korea KOSPI one-week local-currency return-3.8%The table shows relatively weak one-week performance in Korea, although its year-to-date return remains high.

Impact & implications

The investment implication is that near-term market focus will shift from macro liquidity and valuation expansion toward earnings delivery. If US AI-related capital expenditure generates verifiable returns, and European manufacturing improvement and currency factors support earnings in non-commodity sectors, current valuations may receive further support. Conversely, excessive concentration in earnings growth, a reversal of crowded momentum trades, and elevated valuations could amplify market volatility.

Risks

• Second-quarter earnings below elevated expectations could trigger a repricing of currently high valuations.
• US earnings growth is overly concentrated in AI infrastructure companies; if returns on AI investment remain unclear, market confidence could decline.
• European earnings growth is concentrated among energy and commodity producers, and earnings expansion into non-commodity sectors remains to be validated.
• The sharp reversal in momentum trades indicates rising crowded-trade risk and could lead to further style volatility.
• Macroeconomic data, central-bank communication, exchange-rate movements, and interest-rate changes could affect global risk appetite.
• Changes in cross-asset correlations, volatility, and dividend expectations could amplify asset-allocation risks.

What to watch

• Whether AI capital expenditure begins to generate quantifiable returns in US second-quarter earnings.
• Whether S&P 500 earnings growth broadens from a small number of AI infrastructure companies to a wider range of constituents.
• Whether improving European manufacturing activity and a weaker euro can support earnings in sectors beyond energy.
• Whether the momentum-factor pullback is merely short-term rotation or a more persistent de-crowding process.
• Whether earnings revisions and earnings sentiment indicators remain positive during the earnings season.
• The impact of the US ISM services index, FOMC minutes, and Federal Reserve officials' speeches on interest-rate expectations.
• The impact of Chinese credit and inflation, Asian export and GDP data, and the Bank of Malaysia meeting on Asian risk assets.