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Goldman Sachs' Prime Brokerage weekly market flow report confirms that the flow of funds from "smart money" is undergoing a key allocation shift.Specifically, hedge funds began to accelerate their escape from the "AI bubble."

Last Thursday, the S&P 500 fell 0.88% and the Nasdaq fell 1.95%, both ending their seven-day winning streak and falling from new highs, and experiencing their worst single-day performance since April 30. Small-cap stocks rose 3.6%, the best since November last year and the highest in more than two years, benefiting from factors such as CPI inflation weakening beyond expectations, the upcoming interest rate cuts, and the steepening of the U.S. Treasury yield curve under the "Trump deal".

At that time, according to Bespoke Investment Group, this was the first time since October 10, 2008 that the Russell 2000 small-cap index rose by more than 3% while the S&P 500 fell, and the second time this has happened since 1979. At the same time, the Russell 2000 index exceeded the Nasdaq 100 by 5.8 percentage points, the widest since November 2020.

Goldman Sachs found that seven of the 11 major sectors of the S&P 500 index experienced net outflows of funds last week, mainly concentrated in sectors such as information technology, communications services, industrials and staples, while cyclical stocks such as non-essential consumer goods, energy, utilities and real estate were net bought.

More importantly, hedge funds have been net sellers of information technology and communications services (TMT) stocks for the fourth consecutive week and have been net sellers of TMT stocks for seven of the eight weeks ending last week.

Among them, last week's selling was mainly driven by longs and shorts in a ratio of 4 to 1. In the information technology sector, except for IT services, almost all sub-sectors saw net selling, mainly involving software, technology hardware and electronic equipment, while in the communication services sector, net selling of interactive media and services, entertainment and diversified telecommunications services exceeded net buying in the media industry.

Goldman Sachs therefore noted:

"Goldman Sachs Prime's current holdings of TMT stocks are 12.4% underweight compared to the S&P 500 (8.7% at the end of May) -This is the most undervalued record for technology stocks in history since we have data!”

Goldman Sachs' weekly fund flow report also showed that the total leverage ratio of US long/short positions rose for the first time in eight weeks last week, but the net leverage ratio fell for five consecutive weeks, indicating that hedge funds are becoming more cautious. Last week, the US stock market showed net selling for five consecutive weeks, with individual stocks in TMT leading the sell-off. Fund managers continued to reduce their net long positions in individual stocks. "Last week's nominal long selling of individual stocks was the second largest so far this year."

In another report produced by Robert Quinn, a futures trader at Goldman Sachs, institutional investors’ positions are very crowded. “Institutions have never been so focused on long equity futures and Treasury futures, and so focused on shorting VIX futures,” he said.

Institutional asset managers’ notional net positions in a wide range of financial futures markets are at record levels.
For example, their long position in the U.S. stock market is $300 billion, which also accounts for 40% of total open interest, a record high, higher than the net flat position two years ago and the five-year average of $150 billion.

In U.S. Treasury futures, their net long position is $525 million, up nearly $200 million over the past two years and well above the five-year average of $350 million.

In VIX futures, although institutional asset managers are typically net long, their short positions have now reached a record high of $65 million.

Goldman Sachs warned that just because positions are large does not mean a pullback is imminent, and that institutions have held large net long positions in U.S. equity futures for most of the year, consistent with price action and corresponding gains.

Although the baseline scenario modeled by Goldman Sachs still does not foresee a sell-off, for example, for CTA trend-following strategies, a sufficiently large negative catalyst is needed to trigger a meaningful sell-off. The same is true for volatility-based investment strategies such as risk parity. Volatility must first rise significantly before a sell-off can occur.However, the over-concentration of institutional positions poses a risk of a larger retracement in the future.。

Wall Street News mentioned that last week, Goldman Sachs said in its review of AI transactions that investors are increasingly concerned about "overinvestment". Although AI infrastructure-related stocks have performed strongly, concerns about the return on AI investment remain, and the downward revision of second-quarter revenue will hit valuations hard:

Goldman Sachs believes that the second quarter earnings season will be an important test, and investors should pay attention to the revision of revenue forecasts, which will be the key to assessing the sustainability of AI investment trends. Goldman Sachs expects to achieve a similar return on investment as in recent history. Hyperscale companies need to generate about $335 billion in revenue in 2025, otherwise they may face the risk of a valuation cut.Investors alsoAIcompany“return on investment”The potential is skeptical, questioning whether huge investments can bring enough sales growth and revenue.beneficial.