This is not a mean-reversion market! Goldman Sachs' top traders' ten observations on the market

This is not a mean-reversion market! Goldman Sachs' top traders' ten observations on the market

In the current U.S. stock market led by technology, market styles are distinctly differentiated. Goldman Sachs TMT senior trader Peter Callahan recently stated:

"This is not a mean-reversion market."

As AI and the performance of large technology companies continue to exceed expectations, related sectors are showing sustained breakthroughs and capital attraction effects, while the previously "lagging" sectors lack the momentum for a rebound, with a clear contrast between hot and cold industries. The market's reaction to the latest round of earnings once again highlights the premium capabilities of the leaders and the continuation of structural trends.

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

1. META: Stunning performance, tactical position adjustments effective

Meta Platforms' earnings report was astonishing. Despite market concerns about "expenses," tactical position adjustments had already been completed before the earnings release. Meta's advertising revenue accelerated by 2 percentage points year-over-year to 22% (at constant exchange rates), with strong momentum in its core business (Instagram video viewing time globally increased by 20% year-over-year). Additionally, catalysts such as the Goldman Sachs Technology Conference and Meta Connect are approaching, along with the "relief" of capital expenditure/operating expenditure risks for 2026 (Goldman Sachs Research estimates capital expenditure for 2026 to be around $100 billion, with GAAP expenditure increasing by 25% year-over-year), all supporting Meta. Meta has exceeded market expectations for EPS by about 10-20% in each of the past eight consecutive quarters.

2. Microsoft: Outstanding performance, AI permeates the entire stack

Microsoft's earnings report is one of the best-performing reports recently. Even with a significant increase in capital expenditures and growth in AI cloud workloads/revenue, its gross margin and operating margin remain stable. Goldman Sachs Research believes this quarter's earnings report validates the view that AI is penetrating upward into the technology stack, with Microsoft's leading position in GPU computing creating a chain reaction that drives demand for its broader and higher-margin products, which uniquely cover all levels of the technology stack. Goldman Sachs Research expects Microsoft's EPS for fiscal year 2027 to be around $19.32, with the current stock price approximately 29-30 times that expectation. In terms of capital expenditure (including financing leases), Goldman Sachs Research has raised the fiscal year 2026 estimate to about $116 billion and the fiscal year 2027 estimate to about $138 billion.

3. AI: Meta clearly points out the ROI of AI investments

Meta clearly stated that the strong advertising performance this quarter is mainly attributed to AI improving the efficiency and revenue of the advertising system. The AI-driven new recommendation model has expanded to new display interfaces and improved performance by using more signals and longer contexts, resulting in an approximately 5% increase in Instagram's ad conversion rate and a 3% increase for Facebook. Additionally, AI has significantly enhanced Meta's ability to present interesting and useful content to users, with improvements in the recommendation system leading to a 5% and 6% increase in time spent on Facebook and Instagram, respectively, this quarter

4. Increased Capital Expenditure: A New Wave of Growth

Following Google's announcement last week to raise its capital expenditure for 2026 by approximately $18 billion to $102 billion, Meta and Microsoft have also significantly increased their capital expenditures this quarter. Goldman Sachs Research has raised Meta's capital expenditure for 2026 by about $25 billion to $100 billion; Microsoft's capital expenditure for fiscal year 2026 (including leases) has been increased by about $10 billion to $116 billion, with an additional $25 billion for fiscal year 2027.

5. Software Industry: Mixed Blessings, Still a "Stock Picking Market"

Despite strong performances from Microsoft and ServiceNow, the overall performance of the software industry has been uneven. Check Point's earnings report fell short of expectations, leading to a stock price drop of about 15%. Confluent's stock price fell by 25% due to a weak subscription revenue outlook, with the company mentioning that optimization headwinds have led to an unstable net revenue retention rate (NRR) that has dropped to a historical low of 114%. It is currently difficult to draw clear conclusions, and it can only be said that the market environment remains turbulent, not supporting the notion that "everything will improve in the second half of the year," making the software industry likely still a "stock picking market."

6. Public Cloud: Continued Growth, Supply Shortages

The public cloud remains the largest sub-theme in the market. Microsoft's Azure cloud service revenue grew year-on-year at an accelerated rate of 4 percentage points to 39% (at constant exchange rates), noting ongoing capacity/supply shortages. This follows last week's accelerated growth in Google Cloud. The market is closely watching Amazon AWS's earnings report tonight, as well as the performance of cloud infrastructure providers other than Confluent. Data shows that Microsoft Fabric grew by 55% year-on-year ("Microsoft's fastest-growing database product in history"), currently boasting over 25,000 users (with a record addition of 4 million users); the usage of Azure Databricks and Snowflake on Azure has both accelerated; OpenAI is extensively using Cosmos DB. Confluent noted that "its large customers continue to optimize and adopt new use cases at a more cautious pace," and "an AI-native customer is undergoing a broad migration to self-management of its internal data platform, thereby reducing its usage of Confluent Cloud."

7. Adobe: An Undervalued High-Quality Software Company

Goldman Sachs Research recently met with Adobe's management. In Goldman Sachs Research's view, despite relatively muted investor sentiment and positioning, Adobe remains an undervalued, high-quality software company, with AI expected to support its growth vectors. Although Adobe is still in the early stages of several strategic initiatives and expanding its enterprise footprint, management indicated that new solutions will scale in the coming quarters and provide more support for key DM growth metrics (new logo customer additions, retention rates, and upsell opportunities). Goldman Sachs Research believes this could help achieve a turning point for the fiscal year 2026 NNARR (Net New Annual Recurring Revenue)

8. AI and the Internet: AI Assistant Narrative Driving Growth

Apart from cloud service providers, the sentiment towards AI in the internet sector is mostly "moderate," meaning AI is neither a friend nor an enemy. Against this backdrop, some companies are leveraging AI to drive the "AI assistant" narrative, which is impressive. Some quotes from this week's earnings calls of internet companies highlighted the opportunities that generative AI brings to these large-scale internet service providers. In addition to Meta, Booking Holdings also mentioned achieving personalized "connected travel" through AI, creating an experience akin to conversing with a human travel agent.

9. This is Not a Mean Reversion Market: The Strong Get Stronger

An increasingly clear dynamic is that we are not in a mean reversion market (except for the recent pullback in momentum stocks). Those "favored," AI-related, mega-cap stocks continue to break through and attract capital inflows after earnings reports (such as META, MSFT, etc.), while those companies that have underperformed, even in the context of position clearing, lowered expectations, or low valuations, still perform poorly after earnings releases, showing subsequent weakness.

10. Today's Events: Key Economic Data and Earnings Season Peak

Today, the Employment Cost Index (ECI) and PCE Index will be released. Goldman Sachs will host RepVue and a seminar on EU AI and semiconductors. The AEVA Investor Day will be held at 1 PM Eastern Time. Meanwhile, earnings reports in the TMT sector will continue to be released, including those from Amazon, Apple, and others