Still Not Time to "Surrender"! Goldman Sachs Warns: AI May Be the Last Source of Selling Pressure

Although the market has partially de-risked, it is still far from a true “capitulation” exit—meaning downward pressure has not yet fully cleared, and volatility may persist.

Goldman Sachs Managing Director Lee Coppersmith warned in a recent report that the US stock market is showing increasing signs of fragility. The S&P 500 index fell below its 200-day moving average last week, currently around 6,500 points. The market has entered a negative Gamma zone, which amplifies the impact of both buying and selling flows in options trading, significantly widening the price fluctuation range.

Against this backdrop, Coppersmith pointed out that AI-related stocks and the “Mag7” remain among the few sectors with holdings still near historical highs. If investors need to raise more cash or reduce risk exposure, the AI complex could become one of the last and largest potential sell-off sources.

Oversold? Data Still Not Supportive

“Are we already oversold?”—this is the most frequently asked question in the current market, but the data does not provide a comforting answer.

From a breadth indicator perspective, only about 14% of S&P 500 components are currently in oversold territory, compared to over 50% in April 2025 and more than 40% in Q3 2022. Tactical rebounds are possible, but the overall pattern does not yet show the characteristics of a “capitulation” bottom.

The Goldman Sachs Sentiment Indicator has fallen from +1.40 in early January to -0.32 now. While this is a meaningful reset, it is still far from the levels associated with major market lows in history. Based on experiences from 2009, 2011, late 2018, 2022, and April 2025, sustained bottoms typically occur near -2 standard deviations or lower. The current reading suggests investors are no longer aggressively long but have not yet shifted to low allocations—de-risking has begun but is not complete.

Systemic Funds Have Moved, Hidden Risks Remain

On the systemic level, adjustments have already started. Commodity Trading Advisors (CTAs) in the US market have turned net short, indicating that initial mechanical selling may have largely played out. However, if the market enters a more sustained downtrend, CTAs still have room to increase their short positions.

Meanwhile, volatility control funds and risk parity funds have not yet significantly reduced their exposures. Coppersmith estimates that if volatility continues to rise or macro shocks persist, these two types of funds could add to potential supply pressure.

In the volatility market, a shift has occurred. VIX positions have moved from net short to net long, with persistent buying this week—indicating the market has transitioned from “insufficient hedging” to “active protection buying.” Goldman Sachs prime broker data also shows that short positions are at five-year highs, mainly concentrated in macro products and indices, while individual stock short covering remains limited.

Cyclical Stocks Under Continuous Liquidation, AI Holdings Stand Out

In terms of sector flows, cyclical stocks have faced ongoing pressure. Hedge funds have been net sellers in energy, materials, industrials, financials, and real estate sectors for nine consecutive weeks, with the pace of selling accelerating since late February. The net buy-sell ratio for these sectors has dropped to 1.68, below the 1.89 high in January and the lowest since May 2025.

In stark contrast, net exposure in AI-related stocks (tracked by Goldman Sachs GSTMTAIP index) and the Mag7 remains near their historical highs. After hitting a historic low in late February, US software sector net exposure has recently rebounded, mainly driven by short covering—even though short positions have been dominant since the start of the year.

AI Complex: The Next “Last Fortress” to Unwind

Based on these signals, Coppersmith concludes: The de-risking phase has already occurred, and the next market direction depends on what investors choose to sell.

After most sectors have experienced systemic deleveraging, the AI complex remains the “last fortress” with the most concentrated holdings and unrealized gains. If the market needs further financing or risk reduction, the AI sector will be the most logical and straightforward source of liquidation.

Goldman Sachs’s conclusion: Cyclical stocks become increasingly attractive when positive news emerges; meanwhile, the AI sector, at this stage, functions more as a “deleveraging or hedging” option for portfolio adjustments.

Risk Warning and Disclaimer

Market risks are inherent; invest cautiously. This article does not constitute personal investment advice and does not consider individual users’ specific investment goals, financial situations, or needs. Users should evaluate whether any opinions, views, or conclusions herein are suitable for their particular circumstances. Responsibility for investment decisions rests with the individual.