Following a survey of Asian institutions, a Goldman Sachs partner commented: Having suffered a major blow in July, they are now "overly cautious" about AI trading.

Following the historic plunge in momentum stocks in July, Asian institutional investors’ enthusiasm for AI-related trades has cooled significantly, but Goldman Sachs believes that the current market caution has gone too far.

According to TrendFocus, John Flood, a partner in Goldman Sachs' FICC and Equities division, released a report on September 10 after completing a week-long survey of Asian clients. The report pointed out that Asian investors are currently generally skeptical of AI trading, which is closely related to the "psychological trauma" left by the sharp drawdown in July.

Goldman Sachs proprietary brokerage data shows that despite a pullback in July, Asian hedge funds are still recording a positive return of approximately 21% year-to-date. Flood believes that multiple positioning and sentiment indicators suggest that investors are currently more cautious than fundamentally supported.

Flood also made a key assessment: American investors may have underestimated the actual speed of adoption of open-source AI models in China, while Asian investors may have overestimated it, and the final outcome may fall somewhere in between. He also pointed out that the upcoming IPO pipeline is expected to be a catalyst for both institutional and retail investors to actively re-enter the market.

Asian hedge funds suffered heavy losses in July, and cautious sentiment spread throughout the market.

In his report, Flood described being "shocked" by the widespread caution and skepticism among local investors regarding AI trading during his Asian research trip. The historic pullback in momentum stocks in July significantly reduced the year-to-date returns of many Asian hedge funds, with some losing more than 20 percentage points of their year-to-date gains in a single month.

This experience left a clear "psychological trauma" on market participants. Flood noted that after the historic momentum pullback in July and lackluster performance in August, he observed a general lack of proactive buying interest among investors. In every conversation with clients, concerns about geopolitics, interest rates, and inflation were repeatedly raised, and both positioning and sentiment indicators remained subdued.

Multiple data points indicate that positions are too light and bearish sentiment is high.

Goldman Sachs cited a series of positioning and sentiment indicators to support its judgment that "the market is overly cautious."

On the sentiment front, individual investor sentiment remains bearish, with Goldman Sachs' sentiment index falling into negative territory to its lowest level since March. Nasdaq 100 futures short positions have risen 35% since mid-June, and average short interest in S&P 500 components is also at a high level.

At the institutional positioning level, Goldman Sachs proprietary brokerage data shows that the total leverage ratio and net leverage ratio of US fundamental long-short strategy funds are 207% and 49.8%, respectively, ranking in the 20th and 6th percentiles over the past year, and in the 59th and 10th percentiles over the past three years. The US fundamental long-short ratio has fallen back to levels close to the "Liberation Day" lows.

In the technology and AI sector, total and net allocations to US information technology stocks have declined sharply after hitting a five-year high in June, and are currently at the 43rd and 71st percentiles, respectively, over the past year. Goldman Sachs' long/short ratio for its broad US AI stock basket (GSTMTAIP) has fallen to 3.54, down from a one-year high of 4.27, and is at the 38th percentile over the past year.

Regarding mutual funds, although the cash balance as a percentage of total assets is relatively low, it remains higher than the historical average when measured in absolute notional amounts. While the weighting of AI-related stocks in mutual fund portfolios has increased, it still significantly lags behind index weighting, indicating that funds as a whole are significantly underweighted in AI-related stocks. During the second quarter, most mutual funds reduced their holdings in the constituent stocks of the "Magnificent 7," with the most significant reductions in Alphabet (GOOGL) and Meta (META).

Strong Q2 earnings, supported by fundamentals and diverging from market sentiment.

Flood emphasizes that there is a clear disconnect between the current cautious sentiment and corporate fundamentals.

In the second quarter of 2026, S&P 500 earnings per share increased by approximately 30% year-over-year (excluding "other income" related to certain private equity investments). Hyperscale cloud providers and AI infrastructure companies benefiting from their capital expenditures saw earnings increase by 54% year-over-year, contributing approximately 50% of the S&P 500's earnings per share growth in that quarter.

It is worth noting that earnings growth in the rest of the market was also strong and accelerating. Excluding the energy sector, which was boosted by rising oil prices, earnings per share for the rest of the S&P 500 rose by 14% year-over-year, demonstrating the broad scope of earnings improvement.

Options Market Signals: The market is not "fully positioned," and upward insurance demand is emerging.

Brian Garrett, a colleague at Goldman Sachs, further corroborated the above assessment. He pointed out that whenever the S&P 500 attempted to break new highs, voices quickly emerged questioning the intraday strength; the volatility of the S&P 500's rebounds was almost twice that of its declines; and the implied volatility of S&P 500 call options had a significantly high correlation with the realization of spot prices. Garrett believes that these are not behavioral characteristics of a "fully invested" market, and the upcoming meeting season may further amplify this dynamic.

From an option structure perspective, the contrast between bullish and bearish skew on individual stocks further confirms the market's cautious tone—some investors are buying "just in case" upside insurance rather than actively adding to their positions to bet on an upward move. Flood believes that, taking all these signals together, the current market's defensive positioning provides room for potential upward movement, especially given the backdrop of a high-profile IPO and a strong earnings season.

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