Pessimists are smart, but optimists make money! Goldman Sachs trader: The AI debate will take several more quarters to reach a conclusion, so don't go against capital expenditures.

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In a market flooded with "noise," staying optimistic often yields better returns than sounding smart with pessimistic rhetoric.

Recently, Bobby Molavi, Managing Director and veteran trader at Goldman Sachs, wrote that, although the market is rife with signs of bubbles, the core pillars driving this long bull run—especially the massive capital expenditures triggered by AI—show clear trends. He believes that before the long-term AI narrative comes to fruition, resisting the flood of capital it unleashes is futile.

For investors, discerning the signal, ignoring the noise, and recognizing that AI’s ultimate success or failure cannot be determined in the short term may be the most crucial survival principle right now. The current "epic" rally, dominated by tech stocks, is harshly punishing market pessimists.

Recently, the US stock market has continued to make history with astonishing resilience. The S&P 500 and Nasdaq have closed above their 50-day moving averages for over 100 consecutive trading days, continuously hitting new record highs.

At the same time, the market's exuberant sentiment is evident. Individual investors have been net buyers in 21 out of the past 24 weeks, ETFs have seen net inflows on 183 out of the past 185 trading days, and bullish options trading volumes have reached record highs, averaging 40 million contracts per day.

Sectors like "most shorted" and "unprofitable tech stocks" have soared recently, and many areas including nuclear energy, quantum, drones, and artificial intelligence have also performed impressively.

A Goldman Sachs index measuring the intensity of long and short interest (GSPUWSHI) has experienced its most intense short squeeze since the 2021 "meme stock frenzy."

No Conclusion Yet on AI Debate, Closely Following Trillion-Dollar Capital Expenditures

The debate over whether AI is a revolution or a bubble may take several more quarters, or even longer, to be settled. However, Bobby Molavi points out a reality that cannot be ignored: the massive capital spending behind it.

Molavi mentions that a research report predicts that by 2029, capital expenditures by "hyperscale computing companies" alone will reach $2.8 trillion, and total global related capital expenditure during the same period will soar to $5.5 trillion.

Molavi believes that the momentum of such capital inflow is like a giant ship—it takes time to start and stop, and absolutely cannot change direction overnight. Therefore, in the investment cycle over the next five years, the performance of a single quarter is almost irrelevant.

He compares this logic to the old market adage "Don't fight the Fed," noting:

“It’s really hard to fight capital expenditures right now; if you turn bearish too early or make a misjudgment, it’ll be hard to survive.”

Three Tailwinds: Interest Rates, Earnings, and Employment

Apart from AI, Molavi also points out three other key driving forces supporting the market.

First is interest rates. He believes that a decline in US interest rates is highly probable, whether due to inflation normalizing, an economic slowdown, or potential political pressure. This will undoubtedly provide another tailwind for capital markets.

The second is corporate profits. The spread of AI will support corporate profit margins in two ways: either by directly reducing costs through improved efficiency and productivity, or, under the "halo" of AI, companies will be forced to become stricter in improving productivity to demonstrate their AI investment and results, thus effectively cutting costs.

Finally, employment. In contrast to the resilience of corporate profits, the unemployment rate may rise due to efficiency gains driven by AI. This once again confirms the divergence between market performance and the real economy—especially the underlying economy—that is, the market prices in productivity prospects, not overall employment levels.

Market Indicators Have Reached Fever Pitch

Current market sentiment indicators have reached extreme levels.

According to Goldman Sachs, over the past 20 days, average daily call option trading volume has reached 40 million contracts, a record high and double the level of three years ago. Last Wednesday, call options made up as much as 65% of total options trading volume. Even more noteworthy, both the S&P 500 and Nasdaq set new all-time highs that day, yet 57% and 51% of their component stocks fell, respectively.

Tech and tech-related stocks now account for 56% of US stock market capitalization, while defensive stocks have fallen to just 16%, the lowest ever recorded. Molavi likens this to a late-night party:

“You never feel it’s time to go home…you always think the party will last forever.”

He warns that while hangovers may be delayed, they almost never fail to arrive.

The "Illusion" Under Dollar Depreciation: What Are Assets Priced In?

From another perspective, this bull market also reflects a “depreciation trade” on fiat currencies.

Since the pandemic, the Nasdaq measured in US dollars is up 165%, and the S&P 500 is up 102%. But if calculated in other units, the conclusion is vastly different: measured in gold, the Nasdaq is up only 7%, and the S&P 500 is actually down 18%. Measured in Bitcoin, both have plummeted—by 78% and 84%, respectively.

Molavi points out that this shows that since the pandemic, assets not exposed to the US dollar have appreciated fastest. This reminds investors that the choice of “currency” as a benchmark is critical when evaluating asset returns. This also explains why, beyond traditional asset classes, assets like Bitcoin and gold have been in favor.

Risk Warning and DisclaimerThe market entails risk; investment requires caution. This article does not constitute personal investment advice and has not considered the special investment objectives, financial situation, or needs of individual users. Users should consider whether any opinions, views, or conclusions in this article are suitable to their particular situation. Investment based on this content is at your own risk. ```