Goldman Sachs Head of Hedge Funds: Signs of long liquidation are appearing in U.S. stocks, and the AI cycle seems to be entering a new phase of skepticism.

Tony Pasquariello, Goldman Sachs partner and global head of Goldman’s hedge fund tracking division, believes that signs of “capitulation” among bulls have appeared in the U.S. stock market. The market seems to be entering a new phase of the Artificial Intelligence (AI) cycle, as investors begin to question the sustainability of capital spending and future returns for hyperscale cloud service providers.

Nevertheless, Pasquariello still maintains his assessment that the main upward trend in U.S. stocks remains intact and expects the S&P 500 to end 2025 above current levels, though he has downgraded his expectations for next year’s market performance.

This Thursday the U.S. stock market plunged deeply; the S&P 500 Index surged as much as 1.9% intraday at its peak, but ultimately closed down nearly 1.6%, losing over $2 trillion in market value from the intraday highs and (for the first time in months) finishing below its 100-day moving average. Despite Nvidia posting stellar results after Wednesday’s close, concerns about high valuations persisted. Since the start of November, the S&P 500 has dropped about 4%, set to post its worst November performance since 2008.

In a client report released this Friday, Pasquariello noted that although lower prices may prompt more systemic and discretionary selling, and the “post-party hangover” from October may not be over yet, his intuition is that the market has experienced significant risk transfer this week, and some signs of capitulation have emerged.

However, the New York Fed President Williams—who permanently holds a voting seat on the FOMC and ranks third at the Fed—sent dovish signals on Friday. He said that as the labor market cools, there is still room for further rate cuts in the near term. This statement fueled bets on a December rate cut, with the probability for a 25-basis-point cut jumping from about 30% at Thursday’s close to as high as 56%.

Vail Hartman, U.S. rates strategist at BMO Capital Markets, noted that Williams’ comments are crucial because he is a centrist voting member on the FOMC and his vote may ultimately decide the direction of December’s rate decision. Previously, it was unclear where he stood on the outlook for the December meeting.

Signs of Bull Capitulation Emerge, Selling Pressure Not Fully Released

Goldman’s trading desk has observed progressive selling pressure for several weeks, but Thursday’s selloff was sudden, as investors rushed to lock in year-to-date gains. Citing client conversations and market action, Pasquariello noted that although the S&P 500 is still up roughly 11% for the year, the market is experiencing a significant risk shift.

Pasquariello pointed out that while Nvidia delivered “impressive, better-than-expected results and raised guidance,” the market appears to be shifting into a new stage of the AI cycle. Investors are questioning the sustainability of capital spending and future returns for hyperscale cloud providers.

Wallstreetcn previously mentioned that Goldman Sachs trader Rich Privorotsky noted in a recent report that the AI narrative has shifted towards Google and its Gemini-3 model’s disruptive breakthrough. This “disruptive model” is reshaping the entire AI investment ecosystem, forcing other companies to delay product cycles, boosting capital expenditure, and making the return on investment more uncertain. The market is clearly forming a “winner vs. loser” pattern, with risks of a “winner-takes-all” dynamic in the model space.

Fed Hawks Increase Policy Uncertainty

Employment data have further complicated market sentiment. Pasquariello said the trailing three-month average increase in jobs is “decent,” but the rise of the September unemployment rate to 4.44% is “worrisome.” He noted that recent increasingly hawkish commentary from Fed officials has reignited policy uncertainty, with some officials suggesting reluctance to cut rates in December. “That marks a shift from the smooth rate-cut path we seemed to be following.”

In his market review, Rich Privorotsky stressed that the latest employment data presents conflicting signals: solid jobs growth but a surprise increase in unemployment. The rise in unemployment was mainly driven by a surge of younger workers (ages 16-24) entering the labor force, but three-month average job gains fell to just 62,000 and Goldman’s internal employment tracker showed potential gains of just 39,000. More troubling is the ongoing downward revision of jobs data, particularly weak figures for August.

Against this backdrop, the Fed is sticking to its hawkish tone and bets on a December rate cut have been quickly withdrawn. Privorotsky bluntly stated: “Staying hawkish given this labor picture is a policy mistake.”

Williams Turns Dovish, Boosts Market Confidence

On Friday, New York Fed President Williams said that as the labor market cools, he believes the Fed still has room for further rate cuts in the near term, to adjust policy towards a more neutral stance. In remarks delivered in Santiago, Chile, Williams pointed out that downside risks to employment have risen while inflation risks have subsided. He said monetary policy is moderately restrictive at present, but less so than before recent actions.

After Williams’ speech, traders increased bets on a December rate cut. The relevant Fed overnight swap contracts saw rates fall sharply, with market pricing equivalent to about 14 basis points of easing—equivalent to a 56% probability of a 25-basis-point cut—versus just 8 basis points implied at Thursday’s close. The market responded positively: all three major U.S. stock index futures spiked, Treasury prices rose, and spot gold climbed nearly $10 in the short term.

Williams’ comments drew particular attention because, after the Fed’s second consecutive rate cut in October, several officials have voiced opposition or uncertainty about a third rate cut in December. Williams said trade tariffs may have contributed about 0.5 to 0.75 percentage points to current inflation but he does not see tariffs triggering any second-round effects or broader price spillovers. He expects tariffs will continue to push up prices next year but inflation will return to the 2% target path by 2027.

Systemic Factors Amplify Market Volatility

In his market review, Rich Privorotsky noted that this round of market turbulence was caused by four overlapping factors: the Fed’s hawkish turn; dramatic internal divergence among AI sector dynamics; crypto’s flash crash sparking retail “abandonment”; and finally, quant-driven funds’ concentrated selling, pushing the market from “technical volatility” into “structural decline.”

Crypto market turbulence has become the “barometer” for retail risk appetite. Over the past two years, retail has only bought and never sold, buying more as prices fell; but this time, there was a fundamental shift—multiple large accounts sold continuously, and retail investors stopped “holding on” and began actively cutting positions. This panic mood is now spreading to unprofitable tech and AI stocks.

According to Goldman’s report, trend-following funds have held long positions of over $500 billion since early August. Once the index breaks key levels, it triggers sequential selling. As realized volatility rises, volatility-control strategies also begin selling, instantly collapsing the market’s formerly stable “low-volatility structure.” Systemic funds act like machines, collectively dumping positions when triggered by price moves.

Bullish Stance Unchanged, But Expectations Cut

Despite increased market volatility, Pasquariello still believes the main trend of the stock market is upward. He stated that the U.S. economy should accelerate, and liquidity conditions will improve. Although selling by systemic funds still needs to be digested, he expects corporate buybacks and retail investors to step in and buy the dip.

“This is a bull market, and the main upward trend remains intact,” he wrote. He still expects the S&P 500 to finish 2025 above current levels but has trimmed his expectations for next year’s performance.

Goldman’s technical chart shows S&P 500 mini futures could fall further to the 6,500 level. However, Privorotsky believes the fundamental value logic of AI technology remains unchanged, and the real long-term winners will be labor-intensive companies expanding their margins through automation. He thinks the market needs three conditions to stabilize: clearing trend-following fund positions, squeezing out excessive retail longs, and stabilization in crypto, a clear Fed dovish turn, or policy/market-driven support for AI capital spending.

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