The S&P 500 and Nasdaq 100 indexes edged slightly lower on Tuesday, taking a breather from the record highs reached in April. Driven by robust corporate earnings and easing tensions between the U.S. and Iran, both indexes are still on track for their strongest monthly performance in years. However, the rapid rally has pushed major indexes into overbought territory, with investor risk exposure subsequently expanding. Goldman Sachs’ (GS) U.S. equity sentiment indicator now shows that positioning has become excessively high.
Meanwhile, market breadth has deteriorated. This makes the stock market more vulnerable to any reversal as tech giants such as Alphabet (GOOG), Amazon (AMZN), Apple (AAPL), Meta Platforms (META), and Microsoft (MSFT) prepare to report earnings. John Flood of Goldman Sachs stated that with positioning becoming increasingly elevated and key institutional buyers turning into sellers, investors should prepare for a short-term pullback. The Goldman partner expects the S&P 500 to end the year “significantly higher” than current levels, but a potential decline in the short term should be viewed as a buying opportunity.
Goldman analysts noted that the market is increasingly worried about artificial intelligence potentially eroding the long-term profits of U.S. companies. Investors are once again focusing on the extent to which stock valuations depend on profit expectations a decade out, particularly in sectors like software. The investment bank stated that profit expectations ten years from now—known as terminal value—currently account for about 75% of the market capitalization of S&P 500 constituents, nearing its highest level in 25 years. Goldman said the current share of terminal value is highly similar to periods such as the dot-com bubble, when market expectations for long-term growth were similarly extremely optimistic.
Since Anthropic launched a new tool capable of automating tasks in areas such as marketing and data analysis, concerns over AI-driven industry disruption have continued to intensify, with external doubts mounting that such products will pressure traditional software companies. The S&P 500 Software and Services Index has fallen about 17% this year, primarily due to fears that new AI tools could harm future revenue growth and profit margins. Goldman estimates that for every 1 percentage point decline in expected long-term growth, the total enterprise value of S&P 500 companies would drop by about 15%. High-growth stocks would suffer a larger impact, with valuations falling about 29%, compared to a 10% decline for low-growth stocks. Goldman added that high-growth companies are particularly sensitive to changes in long-term growth prospects, and the debate surrounding AI’s disruptive impact—along with the resulting uncertainty over terminal value—will persist for at least several quarters. Analysts indicated that such disruption threats could continue into the later stages of AI adoption.
