Goldman Sachs trader warns of a "stealth bear market": the S&P 500 is just 3% from a record high, while 60% of its constituents are already in bear market territory

The S&P 500 is only about 3% away from its latest record high, yet 60% of the benchmark index's constituents are mired in bear market territory. Bobby Molavi, head of EMEA execution services and trader at Goldman Sachs Group, Inc., pointed out that this picture is striking. He said it is strange that the capex of tech giants is the core driver of the AI-driven stock market rally, yet the share prices of these giants and the beneficiaries of that capex are falling at the same time. "I don't understand why both would come under pressure at the same time, especially when the base case remains that AI will change everything," Molavi said in a report. He described the situation as a "stealth bear market." **Index Near New High, but 60% of Constituents Trapped in a "Stealth Bear Market"** Investors pulled out of AI-related stocks on concerns about the sustainability of massive spending, causing tech stocks to take a heavy hit in recent weeks. On the other hand, as funds rotated from crowded trades into defensive and underweight sectors, most S&P 500 constituents rose over the past month. **The Biggest Winners of the AI Era Have Fallen Into a Bear Market** Molavi said that since October 15, the combined market value of the Magnificent Seven has evaporated by US$4 trillion; and in his memory, this is the first time earnings have been "not good enough." Last Thursday, Alphabet Inc. (GOOGL.US) shed US$500 billion in market value, with its shares posting their biggest drop in 20 years, yet the S&P 500 fell only 0.3% as healthcare, real estate and consumer staples sectors filled the gap. Chipmakers had no such buffer. The Philadelphia Semiconductor Index closed down 7% last Friday, falling below its 200-day moving average for the first time in a year, with its forward price-to-earnings ratio retreating to about 16 times, a low for the AI cycle. Molavi believes demand is not the problem. The latest earnings showed Alphabet Inc. Class C cloud revenue doubled, Microsoft Corporation (MSFT.US) Azure grew 48%, and Amazon.com, Inc. (AMZN.US) AWS grew 39%, the fastest growth rate in five years. **The AI Capex Bill Comes Due, and the Credit Market Issues a Sharper Warning** What the market is really worried about is the bill for AI spending and the payback period. Hyperscalers have gone from "cash printing machines" to "cash burners," and this state will last more than just one or two years. The four major tech giants together generated US$26 billion in free cash flow, only a fraction of previous levels. They are increasingly financing AI buildouts through debt, equity and cash. Molavi wrote that Amazon.com, Inc.'s long-term debt climbed from US$66 billion to US$173 billion in nine months. The debate over AI cash became particularly intense this year In the words of this Goldman Sachs Group, Inc. trader, last week was the day the AI capex bill came due, as investors began to focus on returns rather than ambition, and on cash flow rather than capital expenditure. He said credit ratings are a sharper warning signal for the market. According to Molavi's calculations, since 1996, the spread between B-rated and CCC-rated bonds has reached 8% fewer than five times. In each of those instances, the S&P 500 was at least 11.5% below its 52-week high, and in two of them it was close to 30%. But as of last week, the index was less than 2% below its high. "Friday, wait and see," he wrote.