U.S. stock indices hit new highs, but declining stocks far outnumber gainers? Goldman Sachs: Momentum is crowded, a reversal could trigger a sharp pullback.

S&P 500 Index repeatedly hits record highs, but this cannot hide deep fractures within the market—the number of declining stocks far exceeds rising stocks even as the index climbs. Goldman Sachs chief U.S. equity strategist Ben Snider's team warns in their latest report that the current rally in U.S. stocks is highly concentrated among a few giant tech stocks, and market breadth has fallen to its lowest level since the Internet bubble. Historical data shows a clear correlation between shrinking market breadth and significant stock market pullback risks. Downside risks are continuously accumulating. The report notes that this narrow rally pattern will eventually end in two ways: either lagging stocks catch up, or the leading tech stocks fall back—both paths point to increased volatility in momentum strategies. Goldman Sachs Prime data shows hedge funds’ net exposure to momentum is approaching multi-year highs; while overall leverage has dropped somewhat, it still remains at the high end of the range seen in the past five years. For investors betting on an immediate market rotation, Goldman Sachs believes it is still too early: before AI trading matures, market breadth is unlikely to return to normal. This means internal tensions in the current narrow market will keep accumulating, and once a reversal is triggered, the shock of crowded unwinding will far exceed expectations—this is the biggest potential risk institutional investors face. **Hidden concerns of "negative breadth" behind S&P 500 record highs** Recently, the S&P 500 Index has repeatedly set new highs, but these new highs are supported only by a very small number of large-cap tech leaders. According to Goldman Sachs data, four out of the past five record highs were achieved when the number of declining stocks exceeded rising stocks—so-called “negative breadth” highs. This phenomenon indicates that the apparent market prosperity is strongly diverging from the actual performance of most stocks. Traders employing momentum strategies do not select individual stocks, but chase the strongest trends, hoping to exit ahead of a trend reversal. The report notes that once this one-sided chasing encounters momentum reversal, it will have a pronounced destabilizing effect on the overall market. Recent examples have already exposed the vulnerability of this strategy—capital floods into a hot stock for rally, only to see all gains wiped out within days. **Funds pile into momentum stocks, pullback risk is accumulating** Goldman Sachs Prime data shows hedge funds' net exposure to momentum factors is nearing multi-year highs, meaning that once momentum reverses, forced selling pressure will sharply amplify. At the same time, while overall hedge fund leverage has recently pulled back, it still stands high within the five-year historical range. Goldman Sachs explicitly warns in their report: as the narrow rally persists, risks of pullbacks similar to those in the past are accumulating—the market is increasingly fragile, and the impact during a crash is often greater. The core logic of this pattern is: when large capital is concentrated in the same group of momentum stocks and market breadth continues to shrink, once selling is triggered, the lack of funds to support other stocks will worsen the overall decline. **Nature of shrinking market breadth: AI theme has not yet spread** The current narrowing of market breadth essentially reflects that the AI investment theme has not yet fully spread. The rally is mainly concentrated in AI infrastructure-related stocks, while the broad impact of AI on corporate productivity and business scenarios has not yet been priced in by the market. Once AI is adopted on a large scale at the enterprise level, the market will be able to identify a broader range of beneficiaries—including companies improving results by selling AI products and firms using AI to boost production efficiency. At that point, companies seen as pressured by AI competition will also see valuation pressures ease, and market breadth is expected to gradually return to normal. However, this process cannot be accomplished overnight. The report points out clearly that enterprise AI adoption is a gradual process, and only after the current narrow rally is fully over can true breadth recovery be expected. In other words, the market is accumulating internal contradictions, which will take time to digest—and the clock is already ticking. Risk Warning and Disclaimer The market carries risks; investments require caution. This article does not constitute personal investment advice, nor does it take into account specific investment objectives, financial situations, or needs of individual users. Users should consider whether any opinions, views, or conclusions in this article are suitable for their particular circumstances. Investments made based on this are at your own risk.