Goldman Sachs Sees Rotational Volatility Easing After Hitting Multi-Decade High

Recent sharp rotational volatility in the stock market is likely to slow in the coming weeks, according to a new analysis from Goldman Sachs. The bank cites historical patterns following major market rallies and recent deleveraging by institutional investors as key reasons for the expected stabilization.

Volatility Expected to Ease

Goldman Sachs noted that its long/short S&P 500 Momentum factor recently hit its highest volatility in decades, excluding recessionary periods. This spike follows a historical pattern observed after the S&P 500 rallies by 20% or more over three months.

The bank identified 11 such episodes since 1980, each of which was followed by a period of market consolidation. Analysts also pointed to sharp deleveraging among hedge funds and exchange-traded fund holders as evidence that this "rotational turbulence" is diminishing.

Strong Earnings Season Underpins Market

The assessment comes amid a robust second-quarter earnings season that has broadly surpassed expectations. According to the bank's mid-season update:

• S&P 500 earnings per share (EPS) growth is tracking at an impressive 45% year-over-year, more than double the consensus estimate of 22%.
• A significant portion of this beat comes from $151 billion in "other income" from equity investments at Alphabet and Amazon, plus an additional $3 billion from Microsoft.
• Even excluding these items, EPS growth stands at 26%, the fastest pace since 2021.
• 64% of reporting S&P 500 companies have beaten consensus EPS forecasts by at least one standard deviation, a near-record rate.

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Muted Reaction for Tech Stocks

Despite the strong results, the market's reaction has been uneven, particularly for technology, media, and telecom (TMT) stocks. Goldman's data shows the median TMT stock that beat earnings estimates actually lagged the S&P 500 by 192 basis points on the day after reporting. In contrast, the median stock in other sectors enjoyed an outperformance of 75 basis points.

A potential headwind for the sector is the massive capital expenditure by "hyperscalers." These tech giants reported a combined $182 billion in capex in Q2 alongside just $5 billion of free cash flow, funding the difference with $101 billion in new debt and equity. Analyst estimates now project hyperscaler capex will exceed $1 trillion in 2027.

Goldman Sachs Outlook

Looking ahead, Goldman Sachs maintained its year-end 2026 price target for the S&P 500 at 8,000, which implies an 8% return from the July 30 close. The bank's outlook is supported by positive earnings revisions, with the bottom-up consensus estimate for 2027 S&P 500 EPS having been revised up by 1% since the start of the third quarter.