In one month, U.S. stocks hit 14 new highs and momentum stocks surged. Goldman Sachs reviewed 40 years of history: similar markets usually pull back one month later.

```

The AI wave is pushing the U.S. stock market into a highly concentrated, one-sided trend. The S&P 500 Index has set 14 consecutive record highs over the past month, with a cumulative gain of 10% year-to-date, but this rally has been almost entirely driven by technology and AI-related stocks, with market breadth narrowing to one of the lowest levels in decades.

According to the Wind Chasing Trading Desk, a Goldman Sachs U.S. equity weekly strategy report released on May 15 states that the TMT sector—centered on technology, media, and Amazon and Tesla—has contributed 85% of the S&P 500's year-to-date gains. After excluding TMT, the index has only risen 3%. Nvidia alone accounts for approximately 9% of the S&P 500’s market capitalization weight, yet contributes 20% of the index’s total return for the year. Meanwhile, the Goldman Sachs Momentum Factor (GSMEFMOM) has surged 25% over the past three months, making it one of the strongest rallies on record, and both total leverage and net exposure of hedge funds to the momentum factor are close to five-year highs.

Goldman Sachs warns that, since 1980, similar momentum spikes of this magnitude have occurred 11 times in history, and after peaking, the momentum factor typically continues for around one more month before reversing. When the S&P 500 is near all-time highs, such momentum spikes often signal returns well below average for the following months. Goldman Sachs maintains its year-end S&P 500 target at 7,600, offering only about 1% upside from current levels.

Market concentration hits extremes, "One Big Trade" dominates

The structural characteristics of the current U.S. stock market are stirring widespread attention. Goldman’s report points out that while the S&P 500 has set 14 consecutive record highs over the past month, the proportion of index constituents trading above their own 200-day moving averages continues to decline. At present, the median S&P 500 stock is about 13% below its 52-week high, and market breadth is compressed to one of the narrowest levels in decades.

The core driving force behind this pattern is AI trading. The information technology sector has contributed approximately 659 basis points to the S&P 500’s year-to-date gains, accounting for 66% of total returns; the communication services sector contributed 132 basis points, or 13%. The top ten contributors combined accounted for 84% of the index’s gains for the year, led by Nvidia, Google, Micron, and Broadcom.

Several fund managers told Goldman Sachs that it is extremely difficult to find investment opportunities unrelated to the AI theme in the current market environment. Goldman Sachs describes this phenomenon as "One Big Trade"—the market is no longer simply a "collection of stocks," but is centered around a highly homogeneous, single-direction AI wager.

Momentum factor spikes: Short-term continuation, medium-term pressure

Goldman Sachs’ systematic study of momentum factor trends since 1980 shows that the current situation is highly similar to 11 comparable historical cases. In these scenarios, when momentum factors rose by 20% or more within three months, they typically continued for about one more month, with an additional average increase of 6%, then turned downward over the following two or three months.

For the S&P 500 overall, when momentum surges occur and the index happens to be near highs, subsequent returns are often significantly weaker. Goldman data show that, among the five momentum surges that happened with the S&P 500 within 5% of all-time highs, the median subsequent 1-month and 3-month returns were -0% and -0%, with the probability of positive returns only 20% to 40%. By contrast, in six cases when momentum surges occurred with the index at lows, the subsequent 3- to 6-month median returns exceeded 8%.

The most historically comparable examples to today’s situation include mid-1998, end-1999, mid-2015, and end-2021. Goldman Sachs argues that the macroeconomic outlook and AI investment prospects will be key variables determining the subsequent paths for the momentum factor and the broader market. Reversal of AI investment expectations or a sharp deterioration in the macro environment could trigger a "catch-down" reversal for the momentum factor; while a surprise improvement in the macro outlook could trigger a "catch-up" reversal for laggard stocks.

Upgrades to earnings expectations support the rally, but structural divergence is obvious

Unlike the bubble markets of the late 1990s or 2021, Goldman Sachs points out that this rally has some earnings fundamentals supporting it. Since the start of the year, consensus bottom-up forecasts for S&P 500 2026 and 2027 EPS have been raised by 8%.

The main source of upgrades is highly concentrated: AI infrastructure-related stocks’ 2027 EPS forecasts have been lifted by about 32% year-to-date, energy sector by about 19%, but after excluding these two categories, S&P 500 2027 EPS forecasts are nearly flat year-to-date. However, Goldman notes that this sideways trend is already better than the usual downward revisions, and over the past month, the breadth of S&P 500 EPS revisions across all sectors was positive—that is, more upgrades than downgrades.

At the industry level, recent stock price performance generally aligns with EPS revision direction, but the magnitude diverges significantly. The energy sector's 2027 EPS forecast has been raised by about 26% since before the war, but the sector has only gained about 4% year-to-date; for semiconductors, the opposite is true—the price rally has clearly outpaced earnings revisions. Goldman believes this partly reflects technical factors such as inflows into leveraged ETFs, as well as implicit expectations for long-term earnings growth that have surpassed analysts’ short-term forecasts.

How should investors respond: Diversification and the hedging value of low-momentum stocks

Faced with a highly concentrated AI momentum market, Goldman Sachs provides investors with two strategic approaches.

First, hold some low-momentum stocks as a hedge. Goldman’s study of the most dramatic momentum reversals over the past 100 years found that in these scenarios, laggard stocks (i.e., low-momentum stocks) not only outperformed on a relative basis, but also achieved absolute positive returns. Goldman has filtered out 25 current S&P 500 constituents that are on the short side of the momentum factor but have recently seen upgrades to EPS forecasts for investors’ reference.

Second, construct an "Insensitive Portfolio." Goldman screened from the Russell 1000 Index stocks with the lowest sensitivity in pricing to AI trades and U.S. economic growth, while also having positive EPS revisions. Over the past year, the AI and economic growth factors explained only 13% of median stock daily return variation for this group—far lower than the Russell 1000 median’s 30%. The selected results cover many stocks from the energy, consumer staples, and healthcare sectors, with a median market capitalization of around $25 billion and a forward median P/E of around 17x.

At the sector allocation level, Goldman notes that consumer staples is the sector least correlated with AI and the momentum factor, and healthcare and REITs also show only mildly negative correlation. Considering that the economy may slow in coming quarters, holding defensive sectors with limited AI sensitivity will have some appeal in a diversified portfolio.

~~~~~~~~~~~~~~~~~~~~~~~~

The above exciting content comes from Wind Chasing Trading Desk.

For more in-depth interpretation, including real-time analysis and frontline research, please join the Wind Chasing Trading Desk Annual Membership

Risk Disclaimer and Exemption ClauseThe market involves risks; investments require caution. This article does not constitute personal investment advice and does not take into account individual users’ specific investment goals, financial situation, or needs. Users should consider whether any opinions, viewpoints, or conclusions in this article suit their specific circumstances. Invest accordingly at your own risk. ```