Stock indices are surging rapidly with gains highly concentrated, the bond market has already "sounded the alarm," and Goldman Sachs warns that "high interest rates will kill the U.S. stock market."

Stock indices are surging rapidly with gains highly concentrated, the bond market has already "sounded the alarm," and Goldman Sachs warns that "high interest rates will kill the U.S. stock market."

```

Behind the repeated record highs of US stock indexes, a structural risk is accumulating. The extreme concentration of gains among a handful of tech giants, mechanically driven rebounds by gamma squeezes, and the continued climb of global long-term interest rates together form the most dangerous combination in the current market.

The S&P 500 index hit another record high on Wednesday local time, but nearly two-thirds of stocks fell that day. This marks the seventh time in the last ten record highs that the number of declining stocks has exceeded the rising ones. According to UBS trading desk data, all gains in the index so far this week come from the "Tech Magnificent Seven," while the roughly other 495 constituent stocks collectively had a negative contribution.

Meanwhile, Rich Privorotsky, head of Goldman Sachs’ Delta-One business, warned that within the S&P 500, more stocks are actually hitting new lows rather than new highs, and market breadth continues to deteriorate. Faris Mourad, head of thematic investing at Goldman Sachs, stated bluntly in his latest report: "Prolonged high interest rates are a big problem for the stock market."

The signals from the bond market can no longer be ignored. The yield on the US 30-year Treasury bond has firmly stood above 5%, while the yield on the Japanese 30-year government bond rose overnight to 3.885%, the highest since its issuance in 1999. Goldman Sachs economists have postponed their forecasts for Fed rate cuts to December 2026 and March 2027, with each cut being 25 basis points.

Gains extremely concentrated, breadth at historical lows

The rise in the S&P 500 index this week is almost a "one-man show." According to UBS trading desk statistics, from Monday’s open to Wednesday’s close, the S&P 500 rose a total of 45.32 points, with the "Tech Magnificent Seven" contributing 47.34 points, while the other approximately 495 constituent stocks collectively dragged the index down by 2 points.

Nvidia was the biggest single contributor, rising 4.94% during the week and contributing 22.66 points, nearly half of the total gain. Apple contributed 10.08 points, Alphabet 9.74 points, and Tesla and Meta Platforms contributed 5.26 and 4.63 points respectively. Microsoft was the biggest drag, falling 1.81% and pulling the index down by 6.32 points.

At the sector level, information technology (+20.81 points) and healthcare (+20.25 points) contributed all the gains, while consumer discretionary (-7.52 points) and finance (-5.45 points) were the main drags.

Rich Privorotsky of Goldman Sachs pointed out that while the index hits new highs, the number of stocks hitting 52-week lows remains high. Across 4, 8, 12, 24, and 52-week bases, the number of stocks making new lows inside the S&P 500 is more than those making new highs. UBS also warned, "Once Nvidia or Apple experience capital outflows, in the absence of broad market support, the index could be substantially damaged."

Gamma squeeze creates "false prosperity", feedback loop hard to sustain

This current rally is, to a large extent, not driven by spot buying, but is rather fueled by a historic gamma squeeze. According to Goldman Sachs, last week the notional trading value of call options approached $3 trillion. Hedge funds and retail investors who lagged performance rushed to buy call options in an attempt to catch up, forcing market makers to passively buy stocks, further driving up option prices and creating a positive momentum feedback loop.

Goldman Sachs data show that the S&P 500’s gamma exposure has surged to one of the highest levels since 2021, which makes it mechanically difficult for the index to fall sharply before expiry—unless there is an external shock.

Rich Privorotsky summarizes this phenomenon as: "Weak breadth is a symptom of everything happening inside the market—just a few mega-cap AI beneficiaries are propping it up. It would take a steep drop in oil prices to pull up the rest of the stocks. Once this narrative is interrupted, correlations could suddenly spike."

Long-term rates keep rising, the biggest "stealth killer"

While the stock market celebrates, global bond markets are sending sharply different signals. The US 30-year Treasury yield has stabilized above 5%, and the 10-year yield has risen by 12 basis points since last Friday, approaching the highest level in the past year, driven by the combined effect of geopolitical pressure and CPI, PPI data exceeding expectations.

Japan’s bond market moves are also alarming. The 30-year Japanese government bond yield climbed overnight to 3.885%, the highest since its 1999 issuance. The collapse in Japanese government bond prices has attracted widespread attention in the market.

Faris Mourad from Goldman Sachs pointed out in his report that, compared to the beginning of the year, the macro environment for 2026 has fundamentally changed: Goldman Sachs economists have postponed their forecast for Fed rate cuts to December 2026 and March 2027; oil prices are unlikely to return to January levels; inflation data exceed expectations; optimism about growth has decreased. He made it clear, "Prolonged high interest rates are a big problem for the stock market."

Goldman Sachs's "prescription": Short low quality, long mega-cap cloud computing

Facing the above risks, Goldman Sachs offers concrete trading strategies.

On the short side, Goldman Sachs suggests shorting unprofitable, non-long-term theme tech stocks (GSCBNOPS). The bank has split unprofitable tech stocks into two subgroups: unprofitable tech with long-term thematic attributes (GSCBNOPL) and those without (GSCBNOPS). Mourad believes the latter, in a scenario of sustained high interest rates, still has about 14% downside compared to the S&P 500 excluding AI index (SPXXAI).

Goldman Sachs also turns bearish on a low-quality thematic basket (GSXULOWQ), which integrates unprofitable techs, low-profit small caps, high-yield bond sensitive companies, high floating-rate debt companies, and those considered exposed to AI disruption risk. Goldman Sachs estimates this basket has about 20% downside versus SPXXAI. Of note, all companies with long-term thematic exposure have already been excluded from the basket to avoid passive losses in the next round of large short squeezes. This basket’s average daily liquidity is about $1 billion, and the weight of any single stock does not exceed 1%.

On the long side, Goldman Sachs recommends allocating to mega-cap cloud computing companies (GSXUHYPR), thinking these lagged in the AI boom but have catching-up potential. Goldman Sachs estimates mega-cap cloud computing companies have over 10% upside versus the low-quality basket.

Additionally, Goldman Sachs derivatives team recommends outright buying S&P 500 put options, citing the unusually flat current options skew and relatively low cost of protection.

Risk Warning and DisclaimerThe market carries risks, investment requires caution. This article does not constitute personal investment advice, nor does it take into account the special investment objectives, financial situation or needs of individual users. Users should consider whether any opinion, view or conclusion in this article fits their specific situation. Investment accordingly is at your own risk. ```