Written by: Rita

Trends Guide

Last week, global stock markets fell by about 2%. Technology fell by 5%, Japan by 3%, Taiwan by 6%, and South Korea by 9%.

The momentum withdrawal continues to intensify. Oil prices have risen back to $88, and the escalating situation in the Middle East has made the energy sector the only bright spot.

But what Goldman Sachs really wants to say is something else: the boom in AI capital expenditure is accumulating risks. If the profitability of tech giants declines before the returns from AI materialize, the stock market will be hit doubly. The Goldman Sachs strategy team has provided a five-year allocation framework, reducing exposure to technology while increasing exposure to physical assets, but also acknowledges that the cost of comprehensive reduction in the short term is too high, so it has offered five compromise solutions.

Market Overview: Momentum Withdrawal, Energy Rebound

Global stock markets fell by about 2% last week. The technology sector led the decline with a drop of about 5%. The momentum factor has consistently underperformed the market over the past few weeks, which is the core driving force behind this round of decline.

Regionally, Asia has been hit the hardest. South Korea fell by 9%, Taiwan by 6%, and Japan by 3%. Europe has held up relatively well, with the STOXX 600 index falling by only about 2%. Goldman Sachs noted that earnings revisions in Europe are accelerating, with the divergence from the U.S. narrowing.

The escalating situation in the Middle East has pushed Brent crude oil back above $88/barrel, and the energy sector outperformed the broader market last week. Defensive sectors also performed well, as the market is shifting from growth stocks to value and defensive stocks.

The Hidden Risks of AI Capex Boom

The Goldman Sachs strategy team has added an important reminder in this report.

Over the past three years, global financial assets have performed strongly, with stocks particularly prominent. The result is that the "world portfolio" has become heavily biased towards U.S. assets, stocks, and the technology sector. The boom in AI capital expenditure increases the risk that the declining profitability of large technology stocks will drag down market returns, especially before the returns from AI have materialized.

Goldman Sachs conducted a long-term backtest using a "systematically neutral portfolio." The results show that a regularly rebalanced "systematically neutral portfolio" has outperformed the "world portfolio" in the long run. Currently, this portfolio points to a lower weighting in stocks, a lower weighting in technology, and a higher allocation to physical assets.

The key issue is timing. In the short term, the cost of underweighting stocks and technology is too high; missing just a few days of gains could lead to underperformance for an entire year. Goldman Sachs' proposed solution is to maintain exposure to innovation while hedging against inflation and diversifying risks through other means.

Five Strategies: How to Hedge Risks While Maintaining Exposure to Innovation

Goldman Sachs has outlined five specific strategies.

Strategy One: Enhance Quality. While maintaining exposure to technology, tilt towards high-quality factors by selecting companies with high margins, strong cash flow, and low leverage. Such companies tend to be more resilient during economic slowdowns while still benefiting from long-term AI trends.

Strategy Two: Increase Physical Assets. Allocate to commodities, infrastructure, and inflation-linked bonds. These assets can provide protection during unexpected inflation spikes, which may also be a market side effect of AI capex expansion.

Strategy Three: Diversify Geographically. The weighting of U.S. tech stocks in the global portfolio has become too high. There are valuation discounts in Europe and Japan that can create a buffer; if U.S. tech stocks experience a pullback, non-U.S. markets are likely to gain relative returns.

Strategy Four: Go Long on Volatility. This direction is not merely betting on a market downturn but using options tools to hedge tail risks. If momentum withdrawal evolves into widespread deleveraging, volatility strategies can play a hedging role.

Strategy Five: Selective Participation in Innovation. Not all tech assets have allocation value. Goldman Sachs believes that long-term winners in AI may not necessarily be the companies currently leading by market cap; companies that can achieve commercialization of AI applications, including software and cybersecurity firms, may hold greater potential.

Trend Perspective

The core message of Goldman Sachs' weekly report is actually hidden in the "Balancing Innovation and Inflation" section, rather than in the preceding market review.

How long will the momentum withdrawal last? Historically, when the momentum factor pulls back from extreme crowded levels, it usually takes a few months to clear. The declines in Asian markets, especially South Korea and Taiwan, have been significant, but technical indicators have not yet shown clear bottom signals.

The returns on AI capital expenditure are a real hidden risk. Goldman Sachs did not say that the AI bubble is about to burst, but rather raised a more subtle risk: the money has been spent, but it has not been earned back. Before the efficiency gains brought by AI technology are truly reflected in corporate profits, if the marginal returns on capital expenditure begin to decline, technology stock valuations will face dual pressure.

That is why Goldman Sachs recommends a five-year portfolio with an underweight in technology and an overweight in physical assets. However, it is challenging to execute this directly in the short term, as a comprehensive reduction carries a high opportunity cost. The core idea of the five strategies is to maintain participation while adjusting the holding structure. Maintain exposure to AI-related assets while balancing portfolio risk using quality stocks, physical assets, geographic diversification, and volatility tools.

Disclaimer

This article is a整理和解读 of third-party brokerage research reports (Goldman Sachs, July 20, 2026) by Trends Research. The ratings, target prices, earnings forecasts, and related judgments quoted in the text reflect the views of the brokerage analysts and only represent their institution's positions, do not represent the views of Trends Research, and do not constitute any investment advice.

Markets carry risks, and decisions should be made independently. This article should not be used as a basis for buying or selling any securities.