- The index hides the damage. The S&P 500 is within about 3% of its latest record high, yet 60% of its members are in bear market territory, according to Goldman Sachs trader Bobby Molavi, head of EMEA execution services, who described the setup as a “stealth bear market.”
- AI spenders and AI suppliers are falling together. Since Oct. 15, the Magnificent Seven have shed $4 trillion of market value, and for the first time Molavi can remember, earnings were “not good enough.” 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 near the AI-cycle lows of around 16 times.
- Demand is not the problem, the bill is. Alphabet’s Google Cloud revenue doubled, Microsoft’s Azure grew 48% and Amazon’s AWS grew 39%, its fastest pace in five years. But the big four generated a combined $26 billion of free cash flow, a fraction of past levels, and Amazon’s long-term debt has climbed to $173 billion from $66 billion in nine months.
- Credit is flashing a sharper warning. The spread between B- and CCC-rated bonds has reached 8% on fewer than five occasions since 1996 by Molavi’s count, and each time the S&P 500 was at least 11.5% below its 52-week high, twice close to 30%.
What Happened?
In a note to clients, Molavi said the “strange thing” is that shares of both the tech megacaps whose capex drives the AI rally and the companies receiving that spending are falling together. “I don’t see how both can be penalized at the same time, especially when the base case remains that AI will change everything,” he wrote. Meanwhile, most S&P 500 members are up over the past month as money rotates out of crowded trades into defensive and under-owned corners; last Thursday, when Alphabet lost $500 billion of market value in its biggest fall in 20 years, the S&P 500 slipped only 0.3% as healthcare, real estate and consumer staples took up the slack.
Why It Matters?
Index-level calm can mask a much weaker market underneath, and Molavi’s numbers show how concentrated the pain is in AI-linked stocks. The issue, in his view, is not demand for AI but the time it takes to earn a return, as hyperscalers turn from “cash printers into cash spenders” and increasingly fund their buildout with debt and equity. He said last week was when “the AI capex bill came due,” with investors shifting toward returns over ambition and cash flows over capex.
What’s Next?
The S&P 500 fell 0.5% on Monday for a third straight loss and the Nasdaq 100 dropped 1.4%, though both gained in early trading Tuesday. The credit signal is the one to watch: Molavi noted that coming into last week the index was less than 2% off its high despite the B-to-CCC spread trigger, a gap that has historically closed with deeper equity drawdowns. Further evidence that AI spending is producing returns would be needed to ease the pressure on tech.
Affected Tickers and Coins: SPY, QQQ, GOOGL, MSFT, AMZN, GS
Source: Bloomberg
