This Is Not a Mean-Reverting Market! Top Goldman Sachs Trader's Ten Market Observations

In the current U.S. tech-led market rally, market styles are distinctly divergent. Goldman Sachs senior TMT trader Peter Callahan recently stated:

"This is not a mean-reverting market."

As AI and large tech companies continue to exceed earnings expectations, related sectors demonstrate sustained breakouts and capital attraction effects, while previous "laggards" lack catch-up momentum, creating stark contrasts between hot and cold sectors. The market's reaction to the latest earnings round once again highlights the premium capability of market leaders and the continuation of structural trends.

Below are ten core observations compiled by Peter Callahan based on the latest market performance and dynamics:

1. META: Stunning Performance, Effective Tactical Position Adjustments Meta Platforms' earnings performance was remarkable. Despite market concerns about "expense" issues, tactical position adjustments were completed before earnings release. Meta's advertising revenue year-over-year growth accelerated by 2 percentage points to 22% (on a constant currency basis), with strong momentum in core business (Instagram video viewing time increased 20% globally year-over-year). Additionally, upcoming catalysts including the Goldman Sachs Technology Conference and Meta Connect, along with the "resolution" of 2026 capex/opex risks (Goldman Sachs Research expects 2026 capex of approximately $100 billion, with GAAP expenses growing 25% year-over-year), all provide support for Meta. Meta has exceeded consensus EPS expectations by approximately 10-20% in each of the past eight consecutive quarters.

2. Microsoft: Outstanding Performance, AI Penetration Across Full Stack Microsoft's earnings report was among the most outstanding recent reports. Even with significant increases in capital expenditure and AI cloud workload/revenue growth, gross margins and operating profit margins remained stable. Goldman Sachs Research believes this quarter's earnings validated the thesis of AI penetrating upward through the technology stack, with Microsoft's leading position in GPU computing creating cascading effects that drive demand for its broader, higher-margin products uniquely covering all levels of the technology stack. Goldman Sachs Research expects Microsoft's fiscal 2027 EPS of approximately $19.32, with current stock price trading at about 29-30 times this expectation. Regarding capital expenditures (including finance leases), Goldman Sachs Research raised fiscal 2026 estimates to approximately $116 billion and fiscal 2027 to approximately $138 billion.

3. AI: Meta Clearly Points to AI Investment Returns Meta explicitly stated that this quarter's strong advertising performance was primarily attributed to AI improving advertising system efficiency and returns. AI-driven new recommendation models have expanded to new display interfaces and improved performance through using more signals and longer context, resulting in approximately 5% increase in Instagram's ad conversion rates and 3% for Facebook. Additionally, AI significantly enhanced Meta's ability to show users interesting and useful content, with recommendation system improvements leading to 5% and 6% increases in time spent on Facebook and Instagram respectively this quarter.

4. Increased Capital Expenditure: New Growth Wave Following Google's increase of approximately $18 billion in 2026 capex to $102 billion last week, Meta and Microsoft also significantly increased capital expenditure this quarter. Goldman Sachs Research raised Meta's 2026 capex by approximately $25 billion to $100 billion; Microsoft's fiscal 2026 capex (including leases) was raised by approximately $10 billion to $116 billion, with fiscal 2027 increased by approximately $25 billion.

5. Software Industry: Mixed Results, Still a "Stock-Picking Market" Despite strong performances from Microsoft and ServiceNow, the software industry's overall performance was mixed. Check Point's earnings fell short of expectations, with stock price declining approximately 15%. Confluent's stock dropped 25% due to weak subscription revenue outlook, with the company mentioning optimization headwinds causing unstable net revenue retention (NRR) that fell to a historical low of 114%. It's difficult to draw clear conclusions currently, suggesting the market environment remains volatile and doesn't support the "everything improves in the second half" narrative, with the software industry likely remaining a "stock-picking market."

6. Public Cloud: Continued Growth, Supply Shortage Public cloud remains the market's largest sub-theme. Microsoft's Azure cloud service revenue year-over-year growth accelerated by 4 percentage points to 39% (on a constant currency basis), noting continued capacity/supply shortages. This follows Google Cloud's accelerated growth last week. The market closely watches Amazon AWS earnings tonight and performance of cloud infrastructure providers beyond Confluent. Data shows Microsoft Fabric grew 55% year-over-year ("Microsoft's fastest-growing database product in history"), currently with over 25,000 users (record 4 million new users added); Azure Databricks and Snowflake usage on Azure both accelerated; OpenAI extensively uses Cosmos DB. Confluent noted that "its large customers continue optimizing and adopting new use cases at a more cautious pace" and "an AI-native customer is conducting extensive migration to self-managed internal data platforms, reducing Confluent Cloud usage."

7. Adobe: Undervalued High-Quality Software Company Goldman Sachs Research recently met with Adobe management. In Goldman Sachs Research's view, despite relatively subdued investor sentiment and positioning, Adobe remains an undervalued, high-quality software company, with AI expected to support its growth vectors. While Adobe is still in early stages of several strategic initiatives and enterprise expansion, management indicated new solutions will scale in coming quarters and provide more support for key DM growth metrics (new logo customer additions, retention rates, and upselling opportunities). Goldman Sachs Research believes this could help with fiscal 2026 NNARR (Net New Annual Recurring Revenue) inflection.

8. AI and Internet: AI Assistant Narrative Drives Growth Beyond cloud service providers, internet sector sentiment toward AI is mostly "moderate," with AI being neither friend nor enemy for most. Against this backdrop, some companies are leveraging AI to drive "AI assistant" narratives, which is impressive. Quotes from this week's internet company earnings calls highlighted opportunities generative AI brings to these large-scale internet service providers. Beyond Meta, Booking Holdings mentioned AI-enabled personalized "connected travel" creating experiences similar to conversations with human travel agents.

9. This Is Not a Mean-Reverting Market: Strong Get Stronger An increasingly clear dynamic is that we're not in a mean-reverting market (aside from recent momentum stock pullback dynamics). Those "favored," AI-related, mega-cap stocks continue breaking out and attracting capital inflows after earnings releases (such as META, MSFT, etc.), while underperforming companies remain weak and lack follow-through after earnings, even with position clearing, lowered expectations, or attractive valuations.

10. Today's Events: Key Economic Data and Earnings Season Climax Today will see releases of Employment Cost Index (ECI) and PCE Index. Goldman Sachs will host RepVue and EU AI & Semiconductor symposium. AEVA investor day will be held at 1 PM ET. Meanwhile, TMT sector earnings continue with Amazon, Apple, and others reporting.