Goldman Sachs Throws Out 'Chilling Chart': Either the Bond Market is 'Overly Pessimistic' or the Stock Market is 'Too Optimistic'

The divergence between stocks and bonds is approaching a critical point!

Written by: Xu Chao, Wall Street Insights

The divergence between the U.S. stock market and the credit market is heading towards a critical point. Goldman Sachs' latest report shows that the credit spread of AI hyperscalers has expanded to its highest level of the year, while the corresponding stock prices have not fully reflected this pressure. Analysts assert: either the bond market is 'overly pessimistic', or the stock market has about 15% of downward space yet to be digested.

Goldman Sachs strategist Louis Miller pointed out in the latest weekly report that the Goldman Sachs AI hyperscaler credit spread index (GSUCHS30) has expanded to its widest level of the year, and the last time the spread was close to the current level, the related stock prices were about 15% lower than they are now. Meanwhile, Goldman Sachs' broader basket of AI beneficiary stocks has cumulatively dropped about 25% relative to the S&P 500 index after excluding AI components since the peak in June.

Credit Signals Alarm Before Stocks

Goldman Sachs warns that the AI hyperscaler credit spread index (blue line, displayed in reverse) has risen to its widest level of the year, while the corresponding stock basket (black line) has only just begun to decline. The last time the credit spread expanded to near the current level in July, the related stock prices were about 15% lower than they are now.

The pressure in the credit market is not limited to large cloud computing companies. The credit default swaps (CDS) of AI hyperscalers have just reached a historical high. In the lower tiers of the capital structure, the situation is even more severe: among 20 junk-rated AI data center bonds, 7 rely on a single tenant, CoreWeave, for repayment, while CoreWeave's own bonds have fallen to distressed levels.

Miller further pointed out that this week, almost no AI sector stocks were spared. Goldman Sachs' AI thematic dashboard shows that NeoClouds has dropped 24.8% over five days, optical networks are down 21.4%, and storage chips have fallen 16.6%. The only theme that recorded a significant increase is 'AI-at-Risk' (traditional industries facing AI impact), which rose by 3.5%.

AI Capital Expenditure Growth Peaks, Profit Contribution Will Gradually Turn Negative

Goldman Sachs' core explanation for the current pressure lies in the turning point of capital expenditure growth. Miller warns: 'The expansion of spreads across the entire sector forces investors to confront a question: What will happen when AI spending growth slows down? AI capital expenditure has likely peaked, and the sustainability of financing and capital returns have replaced recent earnings expectations as the core of market debate.'

According to Goldman Sachs investment research data, the year-on-year growth rate of capital expenditure for hyperscalers peaked at 116% in the third quarter of 2026, with the market generally expecting it to slow down quarter by quarter, dropping to about 20% by the end of 2027.

This trend has a clear impact on S&P 500 earnings. Goldman Sachs estimates that the capital expenditure of hyperscalers (net of depreciation) will contribute about 11 percentage points to S&P 500 earnings per share growth in 2026, dropping to 7 percentage points in 2027, and by 2028, due to massive depreciation of data centers, the contribution will turn negative to -1 percentage point.

In other words, capital expenditure that once boosted profits will become a drag once its growth rate slows down.

Internal Market Indicators Are Simultaneously Signaling Warnings

The pressure in the AI sector is not an isolated phenomenon; Goldman Sachs' 'chilling chart' also shows pressure signals at a broader market level.

On the sentiment side, the volume of put options on Friday reached 'the second highest this year, second only to June'.

On the risk appetite side, Goldman Sachs' Beta factor hedge portfolio (GSP1BETA) has fallen 15% from recent highs, and high-beta cyclical stocks have broken below the upward trend channel.

On the growth expectation side, the implied economic growth expectations of Goldman Sachs' cyclical stocks to defensive stocks ratio (GSP1CYDE, excluding commodities) have dropped to about 2%, indicating that the market's pessimism about growth has exceeded the level supported by fundamental data.

On the leverage and positioning side, hedge funds' Beta exposure is higher than the level implied by leverage—net Beta exposure adjusted for Beta is at the 67th percentile over the past five years, while the net leverage ratio is only at the 17th percentile.

Miller also pointed out that financial conditions have 'shifted from a positive driver supporting growth to a negative drag', with higher interest rates and wider spreads directly impacting debt-dependent stocks. Goldman Sachs' debt-sensitive stock basket (GSX1DEBT) continues to be under pressure relative to the broader market.

Goldman Sachs Provides Five Response Strategies

Despite issuing the above warnings, Miller does not predict a complete market collapse. He believes, 'Although correlations are rising and positions are becoming increasingly crowded, the market is still digesting pressure through rotation rather than a significant decline at the index level,' and proposed five trading strategies.

1. Go long on the 'de-AI-ed' broad market.

The S&P 500 index excluding AI components (SPXXAI) has outperformed the S&P 500 by 586 basis points since October 6, and the correlation between the AI sector and the rest of the market has turned negative. Miller believes that nominal growth and employment data remain resilient, and the effect of interest rates suppressing valuations has been partially released, supporting the continuation of rotation rather than a systemic decline.

2. Go long on quality factors, but be wary of technical risks.

Goldman Sachs' quality factor hedge portfolio (GSP1QUAL) has risen 20% in three months, with the RSI exceeding 80. Miller warns that once inflation and interest rate expectations ease, there is a significant reversal risk. The European quality factor (GSPEQUAL) has risen 7.5% in the past month, showing clear momentum.

3. Mid-term healthcare trades.

Miller is optimistic about ACA beneficiary stocks (GSHLCACA), betting that the Democrats may restore the expired ACA premium tax credit policy to improve patient flow for healthcare providers currently mired in bad debts and self-paying patients.

4. Go long on non-correlated opportunities in Brazil.

Current valuations are at mid-cycle levels, with foreign participation lower than the peak in the previous election cycle, and interest rate-sensitive domestic stocks (GSBZRATE) are lightly held. Miller is optimistic about the upside potential before and after the Brazilian runoff election on October 25, with price-to-earnings ratios expected to be revalued from mid-teens to high teens.

5. Hedge exposure to Taiwanese semiconductors.

Miller points out that TSMC's stock price has still fallen 2.3% after raising its full-year earnings guidance and accelerating capacity expansion, 'fully demonstrating the market's current willingness to buy into the narrative of strong AI demand.' Hedge funds' holdings in Taiwan have reached a historical high, while performance 'has not met extremely high expectations.' Goldman Sachs' Asia team recommends shorting the Taiwanese semiconductor basket (GSXATWSM) and the Taiwanese tech basket (excluding TSMC) (GSXATTXT).