It's not the "surrender" moment yet! Goldman Sachs warns: AI could be the final source of sell-off

Ask AI · Why AI Stocks Have Become the Market’s Final Risk Bastion?

While the market has already completed a certain degree of de-risking, it’s still a long way from a truly “capitulation-style” exit. That means downside pressure hasn’t fully cleared, and volatility may remain elevated.

In a recent report, Goldman Sachs Managing Director Lee Coppersmith warned that the U.S. stock market is showing increasingly frequent signs of vulnerability. The S&P 500 index fell below its 200-day moving average last week, and is currently around the 6,500 level. The market has entered negative gamma territory, where options flow will simultaneously amplify the shock to both buy-side and sell-side activity—significantly widening the distribution range of price volatility.

Against this backdrop, Coppersmith noted that AI-related stocks and the “Mag7” are among the few areas in the market where positioning remains close to historical highs. If investors need to raise additional cash or reduce risk exposure further, the AI complex could become one of the last—and largest—potential sources of selling.

Is it oversold? The data doesn’t support it yet

“Are we already oversold?”—this is the most frequently asked question in the current market, and the answer provided by the data is not reassuring.

From breadth indicators, currently only about 14% of S&P 500 constituents have reached oversold levels, whereas in April 2025 this figure was over 50%, and in Q3 2022 it was also above 40%. Tactical rebounds may occur, but the overall picture still doesn’t have the characteristics of a “capitulation” bottom.

Goldman Sachs’s sentiment indicator (GS Sentiment Indicator) has fallen from +1.40 at the beginning of January to -0.32 today. While it’s a meaningful reset, it’s still far from the levels associated with the market’s historically iconic lows. Based on experiences from multiple stages in 2009, 2011, end-2018, several points in 2022, and April 2025, sustained bottoms typically form near -2 standard deviations or lower. The current reading implies investors are no longer aggressively going long—but they also haven’t shifted into underweight positioning. De-risking has begun, but it’s hard to say it’s been completed.

Systemic flows have moved, but hidden risks remain

On the systemic flow front, adjustments have already started. In the U.S. market, Commodity Trading Advisors (CTAs) have flipped to net short, meaning some initial mechanical selling may have largely played out. However, if the market enters a more persistent downward trend, CTAs still have room to add to their short positions.

Meanwhile, volatility control funds and risk parity funds have not yet meaningfully reduced exposure. Coppersmith estimates that once volatility keeps rising or macro shocks persist, these two types of funds will create additional potential supply pressure.

In the volatility market, the mechanism has already switched. VIX positioning has moved from net short to net long, and has continued to hold a buying bias this week—showing the market has transitioned from “insufficient hedging” to “actively buying protection.” Goldman Sachs’s Primary Broker (PB) data also shows that short interest is at a five-year high, but it is concentrated in macro products and index exposure, while short covering at the single-stock level remains limited.

Cyclicals have cleared consecutively, while AI positioning stands out

From the perspective of sector flows, cyclicals have been absorbing sustained pressure. Hedge funds have been net selling for nine consecutive weeks in non-consumer cyclical sectors including energy, materials, industrials, financials, and real estate. Since late February, the selling pace has clearly accelerated. The cumulative net buy amount has essentially been fully reversed, and the long/short ratio in the related sectors has dropped to 1.68—below the intra-year high of 1.89 in January and also the lowest level since May 2025.

Yet, in sharp contrast, AI-related stocks (corresponding to the Goldman GSTMTAIP index) and the Mag7 still have net exposure close to their respective historical highs. After the net exposure of U.S. software stocks hit a historical low at the end of February, it has rebounded in recent weeks—driven mainly by short covering. Even so, the short positioning in that sector has remained tilted toward the short side year to date.

AI complex: the next “final bastion” to be uncompressed

Putting all the above signals together, Coppersmith concluded: The de-risking phase has already happened; the market’s next direction depends on what investors choose to sell.

After most sectors have already gone through systemic de-risking and position reductions, the AI complex has become the “final bastion” in today’s market with the most concentrated holdings size and unrealized gains. If the market needs further financing or to reduce risk, the AI sector will be the most logically smooth source to sell from.

Goldman’s takeaway is: Cyclicals have become increasingly attractive when news improves; meanwhile, in the current phase, the AI sector looks more like a “liquidation option” for hedging or financing.