The artificial intelligence sector may be approaching a period of consolidation, according to strategists at Goldman Sachs, who note improved prospects following recent market turbulence. They forecast that strong earnings performance and reduced investor positioning will help calm volatile swings.

The team, led by Ben Snider, stated in a research note that AI-related stocks are likely to experience continued volatility after a powerful trend-driven rally. However, robust second-quarter results, combined with recent investor deleveraging, signal a transition into a consolidation phase that could offset concerns over rising capital expenditure.

Snider wrote that the current volatile pattern in AI stocks aligns with historical trends following trend-driven surges, where sharp gains are typically followed by a period of consolidation. As hedge funds and ETF investors cut their holdings in the space, sector volatility is expected to decline. Earnings forecasts for leading AI infrastructure stocks have continued to rise, though the pace of upgrades has slowed compared to the previous quarter.

He added that the latest earnings reports from major cloud service providers "send a signal: capital spending is increasing, external funding needs are rising, but there is also growing evidence of returns from AI investments." Data expectations indicate that after cloud computing businesses posted a 48% growth surprise in the current quarter, revenue growth for large cloud providers is set to accelerate further.

The report noted that Amazon, Alphabet (parent of Google), Microsoft, Meta Platforms, and Oracle collectively spent $182 billion on capital expenditures last quarter, yet generated only $5 billion in free cash flow, while raising $101 billion in equity and debt financing. Analysts predict that combined capital spending by these companies could exceed $1 trillion by 2027, and even with accelerating cloud revenue, their funding needs will continue to expand.

Snider indicated that 61% of S&P 500 companies have reported earnings so far this quarter, with 64% significantly beating earnings expectations, one of the highest levels on record. Excluding gains from equity investments by large tech firms, S&P 500 earnings per share grew 26% year-over-year; including those gains, overall growth reached 45%. Since the start of this quarter, consensus earnings estimates for the S&P 500 in 2027 have been revised up by about 1%, with upgrades across most sectors. However, rising labor and energy costs, along with tariff-related expenses, remain risks to corporate profit margins.