Goldman Sachs internally divided over AI rally: one side warns of peak earnings growth, the other says $1.1 trillion in orders has validated investment returns.

BlockBeats news, November 1 — Two senior strategists at Goldman Sachs have offered sharply divergent views on the outlook for the AI trade. Tony Pasquariello believes that the third-quarter earnings of tech giants have exposed that S&P 500 earnings growth may have peaked, that upward momentum in the market is weakening, and that it is currently unwise to make large bets; London-based strategist Mark Wilson believes that the combined backlog of approximately $1.1 trillion at Google Cloud and AWS already provides fairly clear proof that AI investment returns are materializing, and he maintains a bullish stance.

The data Wilson cited includes: Google Cloud revenue up 103% year over year, with backlog up 256% to $561 billion; AWS revenue up 39%, with backlog up 189% to $578 billion, bringing their combined backlog to about $1.14 trillion. Wilson believes that the growth performance of the world's major cloud service providers shows AI demand remains strong, and that market doubts about investment returns are being answered.

But Pasquariello believes that strong cloud business growth has masked weakness in other core businesses, and that tech giants continue to expand capital expenditure without simultaneously proving room for earnings growth. He pointed out that S&P 500 earnings growth has shown signs of peaking, and that the pace of upward revisions to forward earnings per share expectations has also slowed markedly.

The market's core debate has now shifted from whether AI demand exists to how investment returns will be realized. Although Alphabet has $561 billion in cloud business backlog, it still recorded a net free cash flow outflow of $910 million this quarter, below market expectations of a $3.5 billion net inflow. Another Goldman Sachs strategist, Rich Privorotsky, reduced the issue to "value capture": which companies in the AI supply chain can actually be profitable, and how high a financing cost will be required.

At the same time, performance within U.S. equities has diverged markedly, with the S&P 500 excluding AI stocks significantly outperforming tech stocks in October. Both strategists agree that market volatility is unusual, but they still hold different judgments on whether the AI trade can continue.