Goldman Sachs: The correction of the "Big Seven" is a "pressure release," not a peak, and eight major sectors are rotating underneath.

Goldman Sachs strategists pointed out that the S&P 500 is expected to decline by more than 1.5% this week, mainly due to the Magnificent 7 tech giants generally dropping between 3% and 8%, with a combined market cap evaporation estimated at about $2 trillion. However, Goldman Sachs believes this is more like a "release of pressure from highly concentrated trends" rather than a confirmation signal of a market top. The report also warns that the scale of AI investment has approached or even surpassed the historical peak of tech investment in the 1990s, and the visibility of returns on capital expenditure is the biggest uncertainty in the market right now.
(Previous context: Tom Lee warns: Tech giants stop falling! But other sectors may enter a "rolling bear market")
(Background supplement: Nomura Securities: The US stock bull market is still supported by the AI narrative, but risks cannot be ignored)

Key Takeaways

• The Magnificent 7 tech giants generally dropped between 3% and 8% this week, with a combined market cap evaporation of about $2 trillion, dragging the S&P 500 down by more than 1.5%
• Eight out of 11 major sectors rose this week, the equal-weighted S&P 500 has outperformed the market-cap-weighted version this year, and market breadth is actually improving
• Goldman Sachs estimates that AI investment scale has approached the peak of tech investment in the 1990s, and the visibility of returns on capital expenditure is the biggest uncertainty

The Goldman Sachs report is not saying the US stock market is fine, but rather explaining "why you feel the market is falling, while underneath, many sectors are actually rising." The Magnificent 7 stocks collectively came under pressure this week, pushing the S&P 500 down by more than 1.5%, but beneath the index, eight out of 11 major sectors rose this week.

The heavy weight of the Magnificent 7 market cap

The macro backdrop this week was actually neutral. Oil prices fell about 10%, returning to levels before the escalation of US-Iran tensions in February this year, with the war premium almost completely gone. The 10-year US Treasury yield (the US government's 10-year borrowing cost and a key benchmark for market interest rates) fell over 10 basis points from its peak to 4.37%. The May core PCE inflation (the Fed's most watched inflation indicator, measuring price changes excluding food and energy) was broadly in line with expectations. Micron's earnings also showed that AI-related demand remains resilient.

The Magnificent 7 stocks generally fell between 3% and 8% this week, with a combined market cap evaporation estimated at about $2 trillion. Due to their excessively high weight in the S&P 500, no matter how much other components rise, they cannot fill this gap. This is also why the equal-weighted S&P 500 (which gives each component equal weight regardless of market cap) has outperformed the market-cap-weighted version this year.

This round of pullback is more like a release of pressure from highly concentrated trends rather than a confirmation signal of the end of the bull market. (Goldman Sachs strategists)

AI spending scale approaches the peak of tech investment in the 1990s

Another paragraph in the Goldman Sachs report that makes one pause is about the positioning of the AI investment cycle. Large internet companies (hyperscale cloud providers) are shifting from an asset-light model (profit from software subscriptions or advertising, with low fixed equipment investment) to a capital-intensive model (spending heavily on data centers and GPU procurement), with capital expenditure (capex, referring to long-term investment in hardware and infrastructure) continuing to climb.

Goldman Sachs estimates that current AI investment scale has approached or even surpassed the historical peak of tech investment in the 1990s. Consensus expectations suggest that capital intensity may peak this year or next, but so far, the market has seen no clear signs of a slowdown in capital expenditure. This week, news of a delay in OpenAI's IPO added another layer of pressure to tech stock sentiment, making the question of "how much return can all this AI spending bring?" particularly acute at this point.

Goldman Sachs' own Risk Appetite Indicator once reached the 99th percentile since 1991, implying that the market's expectations for "continued rise" have been fully priced in. The problem now is not that the market is too pessimistic, but that optimism has already been locked in, making any deviation from expectations a trigger for downward revisions. Goldman Sachs' conclusion is not to tell people to exit, but to continue focusing on assets with upward earnings momentum.

FAQ

The Magnificent 7 dropped so much this week, is the US stock bull market over?

Goldman Sachs' answer is no. Eight out of 11 major sectors rose this week, and the equal-weighted S&P 500 has outperformed the market-cap-weighted version year-to-date. Goldman believes this is more like a "release of pressure from highly concentrated trends" rather than a confirmation signal of the end of the bull market, recommending continuing to focus on assets with upward earnings momentum.

What is Goldman Sachs worried about regarding AI capex risk?

Large tech companies continue to spend heavily on data centers and GPU procurement. Goldman Sachs estimates that AI investment scale has approached or even surpassed the peak of tech investment in the 1990s. The market is starting to question whether these capital expenditures can translate into proportional profit returns. Consensus expectations suggest capital intensity may peak this year or next, but there are currently no signs of a slowdown.