Investing.com– Goldman Sachs warned that the sharp surge in stock market momentum accompanying the artificial intelligence-driven rally could foreshadow weaker U.S. equity returns in the months ahead, based on patterns stretching back to 1980.
The registered 14 new record highs over the past month, returning 10% year-to-date, with technology stocks accounting for 85% of the index’s gains. The S&P 500 excluding technology returned just 3% over the same period.
The narrow advance drove Goldman’s Momentum factor up 25% over the past three months, one of its sharpest upswings on record. Hedge fund gross leverage and net exposure to momentum were near five-year highs, Goldman said.
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The concentration of gains led many investors to describe the equity market as “one big trade” rather than “a market of stocks,” the bank said.
Goldman said the macroeconomic backdrop and the trajectory of AI investment would be the key determinants of what came next. A downturn in AI spending expectations or a severe deterioration in the macro outlook could trigger a momentum reversal, as would a sharp improvement that caused lagging stocks to catch up.
Since 1980, Goldman identified 11 comparable episodes where momentum rallied 20% or more over three months. In most cases, momentum extended gains for roughly another month before peaking and reversing lower.
Crucially, sharp momentum rallies that occurred with the S&P 500 near an all-time high tended to precede soft equity returns over the following months. The bank cited mid-1998, late 1999, mid-2015 and late 2021 as historical parallels.
Unlike prior episodes, however, the current rally was underpinned by rising earnings estimates. Bottom-up consensus forecasts for S&P 500 earnings per share in 2026 and 2027 each rose 8% year-to-date, driven mainly by AI capital expenditure expectations and higher energy prices.
For investors seeking shelter from the AI trade, Goldman touted stocks with positive earnings revisions and low sensitivity to both AI and economic growth signals. Consumer Staples emerged as the sector with the least exposure to either theme.
