The S&P 500 posted 14 new all-time highs in the past month, returning 10% year-to-date, with technology stocks accounting for 85% of the index's gain.
Goldman Sachs warned that the sharp rise in stock market momentum accompanying the AI-fueled rally could foreshadow weaker returns for U.S. stocks in the coming months, based on patterns dating back to 1980.
The S&P 500 excluding tech has risen only 3% over the same period.
The narrow nature of the rally has caused Goldman's momentum factor to rise 25% over the past three months, one of the sharpest increases on record. Hedge funds' gross leverage and net momentum exposure were near five-year highs, Goldman reported. The concentration of gains has led many investors to describe the stock market as "one big trade" rather than "a market for individual stocks," the bank noted.
Goldman noted that the macroeconomic backdrop and the trajectory of AI investment will be key factors determining future developments. A decline in AI spending expectations or a sharp deterioration in the macroeconomic outlook could trigger a momentum reversal—as could a sharp improvement, allowing lagging stocks to catch up.
Since 1980, Goldman has identified 11 comparable episodes in which momentum rose by 20% or more over three months. In most cases, momentum continued to rise for about a month, after which it peaked and reversed.
Crucially, sharp momentum rallies, which occurred when the S&P 500 was near all-time highs, typically preceded weak stock performance in the following months. The bank cited mid-1998, late 1999, mid-2015, and late 2021 as historical analogs.
However, unlike previous episodes, the current rally is underpinned by rising earnings forecasts. Consensus S&P 500 earnings per share forecasts for 2026 and 2027 have each risen 8% year-to-date, driven primarily by expectations for AI capital spending and higher energy prices.
For investors seeking protection from the AI trade, Goldman identified stocks with positive earnings estimate revisions and low sensitivity to both AI and economic growth signals. Consumer packaged goods (CPG) companies were the sector least exposed to both factors.