Goldman’s Molavi Says 60% of S&P 500 Is in Bear Market Territory

The S&P 500 Index is within about 3% of its latest record high and yet 60% of the benchmark is languishing in bear market territory.

It’s a startling picture highlighted by Goldman Sachs Group Inc. trader Bobby Molavi. The “strange thing” is that shares in both the tech megacaps whose capex is at the heart of the AI-powered equities rally and the receivers of that spending are going down together, he said.

“I don’t see how both can be penalized at the same time, especially when the base case remains that AI will change everything,” Molavi, the head of EMEA execution services at Goldman Sachs, wrote in a note to clients. He described the setup as a “stealth bear market.”

A powerful rotation as investors switch out of AI-related stocks because of concerns over the sustainability of massive spending has hammered tech stocks in recent weeks. On the other hand, most S&P 500 members are up over the past month as money moves out of crowded trades into defensive and under-owned corners.

Since Oct. 15, the Magnificent Seven cohort have shed $4 trillion of market value and, for the first time that he can remember, earnings were “not good enough,” he said.

Last Thursday, when Alphabet Inc. lost $500 billion of market value as it fell the most in 20 years, the S&P 500 slipped just 0.3% as healthcare, real estate and consumer staples took up the slack.

Chipmakers had no such cushion. The Philadelphia Semiconductor Index closed 7% lower on Friday, below its 200-day moving average for the first time in a year, with forward-earnings multiples back at the lows of the AI cycle at around 16 times.

Demand is not the issue, according to Molavi. The latest earnings updates show that Alphabet’s Google Cloud revenue doubled, Microsoft Corp.’s Azure grew by 48% and Amazon.Com Inc.’s AWS by 39%, the fastest pace in five years.

The market’s anxiety is over the bill for AI spending and the time to a return, as the hyperscalers turn from cash printers into cash spenders for longer than a year or two.

The big four generated a combined $26 billion of free cash flow, a fraction of what they used to, and they are increasingly funding their AI build with debt and equity as well as cash. Amazon.com’s long-term debt has climbed to $173 billion from $66 billion in nine months, Molavi wrote.

Last week was when the AI capex bill came due, in the Goldman trader’s words, with investors shifting toward returns over ambition and cash flows over capex.

The S&P 500 fell 0.5% on Monday for a third straight loss, while the Nasdaq 100 dropped 1.4% as the rotation out of technology carried into the new month. The indexes gained in early trading Tuesday.

Credit is the sharper warning for the market, he said. The spread between B and CCC-rated bonds has reached 8% on fewer than five occasions since 1996 by Molavi’s count.

On each of those, the S&P 500 was at least 11.5% below its 52-week high, and twice close to 30%. Coming into last week, the index was less than 2% off its high, despite the trigger. “Friday, hold my beer,” he wrote.