Goldman Sachs Warns: Record Tech Selloff Signals Unwinding of ‘Long AI, Short Everything’ Trade

Goldman Sachs Warns: Record Tech Selloff Signals Unwinding of ‘Long AI, Short Everything’ Trade

TREE NEWS reports: In a striking revelation, Goldman Sachs’ head of European FICC and equities trading, Rich Privorotsky, disclosed that the bank’s prime brokerage book experienced its largest-ever selloff of technology stocks last week. This massive de-risking comes as the once-crowded trade of “long AI, short everything else” begins to unravel, with investors questioning the sustainability of massive AI capital expenditures and the ability of hyperscalers to monetize their investments.

The AI Trade Under Pressure

Speaking on a podcast from Goldman’s London trading floor, Privorotsky outlined three core issues plaguing the market. First, the cost of capital is spilling over, particularly affecting leveraged players in the AI space such as neoclouds, which may struggle to finance their AI spending. Second, there are physical constraints: a projected power gap of 40-50 gigawatts next year raises doubts about whether data centers can be energized to utilize the chips already ordered. Third, these concerns have pushed investors into a risk-off mode, lowering growth expectations through AI and AI capex trades while flocking to bonds—a move that has caught many off guard.

The focus is now shifting to the third-quarter earnings season, where hyperscalers face a critical test. Market expectations for next year’s AI capex stand at $1.1 trillion, but Privorotsky emphasizes that simply spending big is no longer enough. “It’s not enough to say you’re spending a lot of money; you need to prove that backlog is converting into meaningful revenue,” he said. The pace at which these companies achieve free cash flow breakeven and demonstrate cloud growth and monetization will be crucial for the sensitive credit markets.

Macro Paradigm Shift: From Savings Glut to Spending Glut

Privorotsky also highlighted a seismic shift in the macroeconomic environment. Throughout his career, the world has been in a “savings glut,” with excess money in the system. Now, with over $1 trillion expected to be spent on AI capex in the past year and most governments running fiscal deficits, we have entered a “spending glut.” This transition raises the cost of capital and naturally crowds out marginal, lower-quality borrowers. The stress is visible in widening CCC credit spreads and even in sovereign debt, such as French government bonds, which face high fiscal deficits. Coupled with elevated energy prices, overall risk appetite is being significantly eroded.

Market Sentiment Polarized: AI Giveth and AI Taketh Away

Investor anxiety has become polarized. Privorotsky noted meeting investors who fear being unable to deliver computing power, while others fear over-delivering. “Somehow, two mutually exclusive outcomes sum up the market’s concerns,” he said. With energy prices impacting the economy—the S&P 500 has held up, but the median stock is down over 10%—financial conditions have tightened sharply, forcing the Fed to act more. Privorotsky, who once believed “as goes oil, so goes everything else,” now acknowledges that in the current context, “as goes AI, so goes everything else.”

Despite short-term pressures, he remains cautiously optimistic. Spot prices for computing power are hitting new highs daily, and demand remains “greedy and endless.” In terms of strategy, he sees value in electrification-related assets that have been heavily downgraded, as well as civil aerospace and parts of the transport sector, which now offer a margin of safety.

Key Takeaways for Investors

• AI trade is unwinding: The crowded “long AI, short everything” trade is reversing, leading to record tech selloffs. Investors should reassess exposure to AI-related equities and consider diversifying.
• Earnings season is critical: Hyperscalers must demonstrate monetization and free cash flow progress, not just capex plans. Disappointments could trigger further volatility.
• Credit markets are sensitive: Widening credit spreads, especially in CCC-rated bonds, signal rising stress. Watch for spillover into broader credit and sovereign debt.
• Macro shift to spending glut: Higher capital costs and fiscal deficits may crowd out weaker borrowers, impacting risk assets. Energy prices remain a key risk.
• Selective opportunities: Beaten-down electrification, aerospace, and transport stocks may offer value, but caution is warranted given low conviction.