Not yet time to "surrender"! Goldman Sachs warns: AI may be the final source of selling

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Although the current market has undergone some degree of de-risking, it is still far from a true "capitulation" exit—this means downside pressure has not been fully exhausted, and volatility may persist.

Goldman Sachs Managing Director Lee Coppersmith warns in the latest report that the US stock market is showing increasing signs of fragility. Last week, the S&P 500 index broke below its 200-day moving average, and its current position is around 6,500 points. The market has entered a negative Gamma zone, where option flows amplify the impact of both buying and selling, and the price volatility range has thus significantly widened.

Against this backdrop, Coppersmith points out that AI-related stocks and the "Mag7" remain among the few areas where holdings are still near historical highs. If investors need to further raise cash or reduce risk exposure, the AI complex will be one of the last and largest potential sources of selling.

Oversold? Data doesn't support it yet

"Are we already oversold?"—this is the most frequently asked question in the current market, and the data does not provide much comfort.

From breadth indicators, currently only about 14% of S&P 500 constituents have reached oversold levels, whereas this number exceeded 50% in April 2025 and was over 40% in Q3 2022. Tactical rebounds are possible, but the overall landscape does not show characteristics of a "capitulation" bottom.

The Goldman Sachs Sentiment Indicator has dropped from +1.40 at the start of January to the current -0.32, which is a meaningful reset, but still far from levels seen at iconic market lows. From experiences in 2009, 2011, late 2018, 2022, and April 2025, persistent bottoms tend to emerge at around -2 standard deviations or lower. The current reading means investors are no longer aggressively bullish, but have yet to swing toward underweight—de-risking is underway, but far from done.

Systematic funds have moved, but risks remain

At the systematic fund level, adjustments have begun. Commodity Trading Advisors (CTAs) in the US market have turned net short, meaning the initial mechanical selling pressure may have largely landed. However, if the market enters a more sustained downward trend, CTAs still have room to add to shorts.

Meanwhile, volatility control funds and risk parity funds have not yet significantly reduced exposures. Coppersmith estimates that if volatility continues to rise or macro shocks persist, these two types of funds could exert additional potential supply pressure.

The volatility market has switched mechanisms. VIX positioning has shifted from net short to net long, with steady buying this week—showing that the market has moved from "under-hedged" to "actively buying protection." Goldman Sachs prime broker data also shows short interest at a five-year high, but focused on macro products and indices, while single-stock short covering remains limited.

Cyclical stocks cleaned out, AI holdings remain untouched

From sector flows, cyclical stocks have endured continuous pressure. Hedge funds have been net sellers for nine straight weeks in energy, materials, industrials, financials, and real estate (non-consumer cyclical sectors), with the selling pace accelerating since late February, and cumulative net buying nearly entirely reversed. The long/short ratio for these sectors has dropped to 1.68, below the year's high of 1.89 in January, and is the lowest since May 2025.

In stark contrast, AI-related stocks (Goldman Sachs GSTMTAIP index) and the Mag7 still have net exposures near historical highs. US software sector net exposure hit a historic low in late February, but has rebounded in recent weeks, mainly driven by short covering—even though shorts remain heavy year-to-date.

AI Complex: The next "last fortress" to be unwound

Based on all these signals, Coppersmith concludes: The de-risking stage has occurred, and the next direction for the market depends on what investors choose to sell.

After most sectors have undergone systematic reduction, the AI complex is now the "last fortress," with the highest concentration of holdings and floating profits in the market. If further financing or risk reduction is needed, AI is logically the most fluid source for selling.

Goldman's conclusion: Cyclical stocks are increasingly attractive as sentiment improves; while the AI sector, at this stage, is more likely to serve as a "liquidation option" for hedging or raising funds.

Risk Warning and DisclaimerMarkets are risky, and investment requires caution. This article does not constitute personal investment advice and does not take into account the specific investment objectives, financial situation, or needs of individual users. Users should consider whether any opinions, viewpoints, or conclusions in this article are suitable for their individual circumstances. Investment based on this article is at your own risk. ```