Is the US Stock Bull Market Over? Goldman Says 'Don't Exit Yet': AI Is the Key Variable, Volatility May Intensify

Although major US equity indices remain near record highs, the internal trading structure of the market has quietly changed. On Wednesday (8th), Tony Pasquariello, head of Goldman Sachs' hedge fund business, released a new market commentary, stating directly that 'the market's character has clearly shifted' and warning that the path ahead over the coming months will be 'bumpier.' However, he advises investors not to 'exit prematurely.'

Pasquariello points out that since the S&P 500 hit its peak in early June, the index has been trading sideways within a volatile range. With the second-quarter earnings season underway and seasonal summer liquidity tightening, this choppy pattern is expected to persist.

The highly concentrated positions built during the strong first-half rally are now becoming a source of market pullback. Goldman's flagship momentum pair index (GSPRHIMO) has dropped 22% from its June high, and realized volatility has surged to near five-year highs. This is not random market noise, but rather the result of a position squeeze.

Pasquariello identifies several key factors behind the turbulence in momentum factors:

Excessive Positioning: Goldman's US portfolio strategy sentiment indicator has reached 2.0 standard deviations, sitting at the 98th percentile—the highest level since December 2024.

Extreme Gains: The Philadelphia Semiconductor Index (SOX) has more than doubled from its March 30 low, further fueled by leveraged semiconductor ETFs.

Surge in Speculative Leverage: Trading volume in US-listed leveraged ETFs is several times higher than recent norms, 'clearly felt in daily price movements.'

Seasonal Headwinds: July has historically been a 'bad month' for momentum factors, typically due to issues on the short side.

Against this backdrop, the energy and tech sectors that led the first-half rally are now facing the strongest pullback pressure. Meanwhile, previously lagging sectors like healthcare and financials have recently shown counter-trend gains.

AI Capital Expenditure: The Market's Most Important Single Variable

Pasquariello believes the trajectory of AI capital spending is currently the market's most important single variable, and the upcoming Q2 earnings season will serve as a critical test.

He highlights two core dimensions:

First, the scale of forward-looking spending. This acts as 'rocket fuel' for various AI infrastructure suppliers, but also increases financial pressure on hyperscale cloud providers.

Second, whether these cloud giants can prove their spending is flexible and can be linked to revenue growth.

Goldman analyst Rich Privorotsky offers a sharp interpretation: hyperscalers control infrastructure, software, distribution channels, and customer relationships—'they own the toll road, not just the car.'

He notes that the shift toward open-weight models and routing will generate more traffic for large-scale platforms and deliver efficient outcomes for end users. The key is for these companies to demonstrate they can adjust spending and achieve a turning point in free cash flow.

Pasquariello's view is that the moat of cloud giants does not rest on a single model, but on the entire infrastructure chain. Considering the quality of these management teams and the fact that positions have been significantly compressed recently, he believes 'investors are overly pessimistic about this group.'

Additionally, S&P 500 earnings growth has been strong over the past six quarters, with baseline forecasts still projecting double-digit growth through 2027.

However, Pasquariello acknowledges that given the uncertainty in the AI trajectory and the constraints of the law of large numbers, it's hard not to consider the risk of a 'hangover effect' emerging in 2028.

Small-Cap Tailwinds Fade, Outlook Turns Cautious for Second Half

While small-cap stocks have drawn widespread attention due to their strong performance over the past year, Pasquariello cites research from Goldman analyst Ben Snider to offer a cautious outlook for the second half:

On the macro front, the combination of accelerating economic expansion and Fed easing in 2026 created ideal conditions for small caps, but these favorable factors appear to be fading in the second half.

Regarding AI themes, after index rebalancing, the weight of AI infrastructure stocks in the Russell 2000 has halved from 15% before last Friday's reconstitution to just 7%.

On earnings expectations, analysts have raised 2026 EPS forecasts for the S&P 500 by 9% year-to-date, while downgrading Russell 2000 forecasts by 9% over the same period.

Pasquariello's core assessment is: 'The continuation of the bull market is supported by US economic resilience, strong earnings growth, and continued inflows of retail capital. At the same time, internal market tensions are intensifying, manifesting as a more complex AI narrative and the accumulation of speculative leverage.'

He maintains the same strategic advice he's held for over a month: 'The primary trend remains upward, but the path ahead over the next few months will be wider and bumpier. Therefore, investors should continue holding positions, streamline portfolios to the highest-conviction names, and opportunistically add exposure when downside protection tools occasionally go 'on sale.'