Goldman Sachs hedge fund chief’s “semi-annual summary”: This situation has only happened once before.

```

The S&P 500 Index recorded a total return of about 10% in the first half of this year. If it stays above 7,530 points for the year, it will mark the second time in 68 years that the index has achieved double-digit returns for four consecutive years. Tony Pasquariello, head of Goldman Sachs' hedge fund business, noted in his semiannual market review that this market environment is the most dynamic period he has seen in his 27-year career.

The accelerated advancement of AI infrastructure construction was the central theme throughout the first half of the year. According to Goldman Sachs’ custom baskets, the memory sector soared 250% year-to-date, the data center sector rose 115%, and the AI semiconductor sector climbed 101%. Meanwhile, North Asia’s stock markets performed strongly. The Korean KOSPI yielded a total return of 102% in local currency, the Taiwan Weighted Index rose 62%, and the Nikkei 225 rose 40%—all benefiting deeply from the surge in AI infrastructure investment.

Pasquariello also warned that the market is not entirely smooth sailing. Front-end interest rate expectations shifted dramatically from a projected 50 basis point rate cut at the start of the year to a 37 basis point rate hike, the US dollar went from generally bearish in March to broadly bullish now, and the commodities market experienced intense volatility. Looking ahead to the second half, he maintains an overall stance of "long Delta, long volatility".

Four Consecutive Years of Double-Digit Returns: Only Once in History

The S&P 500's approximately 10% total return in the first half represents a robust performance within the long-term historical context, stronger than the same period last year.

Pasquariello pointed out that if the S&P 500 closes above 7,530 points by year’s end, it will mark four consecutive years of double-digit returns for the index. This scenario has occurred only once before in the 68-year history of the index—during the five-year stretch from 1995 to 1999.

The internal structure of the index is also noteworthy. Although some well-known stocks have fallen sharply from their highs, the overall index shows a pronounced right-tail distribution: 44 component stocks have surged over 50% year-to-date, only 6 have fallen more than 50%; 29 stocks have gained more than 75%; 22 stocks have risen over 100%.

From a style perspective, small-cap stocks stand out, likely to achieve their largest annual excess return versus the S&P 500 since 2003. Pasquariello attributes this to the cyclical growth environment, the exposure of some small caps to biotech and AI infrastructure, and the short squeeze effect driven by record short positions in Russell 2000 futures.

AI Dominates the Market, North Asia Leads the World

The acceleration of AI infrastructure build-out was the most distinctive structural theme of the first half.

Goldman Sachs’ custom basket data clearly highlight the trend: memory sector +250% YTD, data center sector +115%, AI chips sector +101%. The Philadelphia Semiconductor Index rose 102% YTD, recording its best single quarter in history.

North Asian markets became the biggest winners among global stocks in the first half. The three major markets are highly tied to AI infrastructure investment. The Nikkei 225 surged 37% in Q2, marking its largest quarterly gain since data began in 1970. The Korean KOSPI not only performed strongly but also saw five intraday trading halts this year, nearly half the century’s total, displaying the typical pattern of "rising spot prices with synchronized volatility."

It is notable that Asian markets also occupy the bottom of global performance rankings: India’s NIFTY is down 7%, Hong Kong’s Hang Seng is down 10%, and Indonesia’s JCI is down 33%.

Within the US technology sector, there was a divergence that surprised Pasquariello: the "Magnificent Seven" were flat overall this year, while the other 493 S&P 500 components were up 16%.

Choppy Macro Path, Major Reversal in Dollar and Rate Expectations

Despite the overall positive stock market, the evolution of the macro environment has not been smooth.

Interest rate expectations witnessed a marked turnaround: market projections for Fed policy in 2026 shifted from about a 50 basis point cut early in the year to an expected 37 basis point hike now. The US dollar also flipped from widely bearish in March to broadly bullish at present.

As for commodities, crude oil, after a period of storage, has given back most of its earlier gains. Gold and silver had climbed to record highs but peaked instantly upon the announcement of Warsh’s appointment to the Fed, then continued to decline. Pasquariello believes this last drop is more fundamentally meaningful—the era of the Fed responding to every major issue with massive monetary easing may be over.

The momentum factor continues to perform well in a highly dispersed, low-correlation market environment. Goldman Sachs’ flagship pairs trading strategy rose 48% in 2024, 30% in 2025, and is up 57% so far this year.

Hedge Funds Perform Well Overall, But Risks Remain for Second Half

The hedge fund industry continued its strong momentum into the first half after 2025, its best year since 2009, delivering positive returns. All nine hedge fund subcategories tracked by Goldman Sachs posted positive returns year-to-date, with fundamental long/short and macro strategies particularly strong. The Goldman Sachs Hedge Fund VIP basket is up 22% for the year.

Looking to the second half, Pasquariello expects global stocks to continue trending upward, based on Goldman Sachs’ forecasts that S&P 500 earnings growth will remain at double-digit rates through 2027.

However, Goldman Sachs’ macro strategy team also warns of potential risks: matching the valuation of AI-related stocks to AI’s potential macroeconomic contribution requires increasingly optimistic assumptions. The risk of the market overestimating the sustainability of above-average profits is rising, especially for those profits driven mainly by the investment frenzy itself.

Pasquariello also pointed out that multiple factors are increasing overall market risk exposure: record fiscal deficit spending by G3 nations, sustained ramping up of AI capital expenditure by large cloud computing firms, and global exposure to leveraged ETFs reaching $570 billion. He said he will continue to maintain a "long Delta, long volatility" stance in the second half.

The topic of AI regulation is also identified as an emerging variable to watch in the second half. Pasquariello quoted a recent comment: "Today, the AI industry is the only sector in America with less regulation than a sandwich shop." He believes AI’s political issues will become a more important storyline for markets in the second half.

Risk Warning and DisclaimerThe market involves risks; investment requires caution. This article does not constitute personal investment advice and does not take into account the specific investment goals, financial situation, or needs of individual users. Users should consider whether any opinions, views, or conclusions in this article suit their specific circumstances. Investments made accordingly are at your own risk. ```