Investor sentiment toward U.S. stocks has reached its most optimistic level in 10 months, largely driven by sustained excitement surrounding artificial intelligence, according to a new report from Goldman Sachs Group Inc. This heightened bullishness, fueled by a fear of missing out on market gains, is also increasing the potential for a sudden market downturn.
Key Takeaways
- Investor bullishness is at its highest point since December 2024, according to Goldman Sachs client data.
- The ongoing rally in artificial intelligence stocks is the primary driver of current market optimism and investor FOMO (fear of missing out).
- Despite the positive sentiment, analysts warn that this setup increases the risk of a rapid market selloff.
- A survey shows 40% of investors expect the S&P 500 to outperform other global indexes in October.
- Investors are heavily focused on AI infrastructure and the "Magnificent Seven" tech stocks.
AI Rally Fuels Widespread Optimism
A recent analysis from the Goldman Sachs trading desk reveals a significant shift in investor attitude. Bullish sentiment among the firm’s clients is now at a peak not seen since December 2024. The driving force behind this confidence is the persistent growth in stocks related to artificial intelligence.
According to a survey cited in the report, 40% of clients believe the S&P 500 Index will outperform other major global indexes through October. This positive outlook has pushed aside previous concerns about high stock valuations and potential market bubbles.
"Not so distant talks about high valuations and ‘bubble’ territory are forgotten as investors are ready to pile back into stocks," wrote Oscar Ostlund, an analyst at Goldman Sachs, in the report.
The sentiment is so strong that the fear of missing out, often called FOMO, appears to be a major factor. "FOMO is starting to creep as the cost of being on the sidelines might be tipping the scales right now," Ostlund added.
Market Indicators Signal Exuberance
The optimism is not isolated to Goldman Sachs' client base. Other market indicators reflect a similar trend. A sentiment tracker maintained by Barclays Plc has been consistently near a level described as "exuberance."
Similarly, a Bloomberg Intelligence measure has returned to a "manic" zone. Historically, readings in this zone have often been followed by periods of modest or lukewarm market returns, suggesting a potential for caution.
S&P 500 Performance
The optimism has been rewarded in recent months. The S&P 500 has achieved 27 new closing records since June, despite ongoing economic uncertainties such as trade tensions and a slowing labor market.
This sustained rally has reinforced bullish strategies while penalizing investors who have remained cautious. The result is a cycle where positive returns encourage more investment, further driving up prices.
Focus on Big Tech and AI Infrastructure
Investors are channeling their capital into specific areas of the market. The so-called "Magnificent Seven" group of technology giants, which includes companies like Amazon.com Inc. and Microsoft Inc., is a primary target.
According to Goldman Sachs, client positioning in these stocks is at its highest level since June 2024. Despite this heavy investment, many clients have indicated plans to increase their exposure even further.
Investment Themes
When surveyed about specific AI-related themes, investors showed clear preferences:
- AI Infrastructure: Over 50% of respondents said they are most bullish on stocks related to AI infrastructure.
- Niche Sub-Themes: Areas like robotics, autonomous driving, and quantum computing attracted less conviction from investors.
- Momentum Strategy: A majority of investors expect that a momentum strategy—buying winning stocks and selling losers—will outperform the broader S&P 500 for the remainder of the year.
This concentrated focus highlights the market's strong belief in the long-term potential of foundational AI technologies over more speculative applications.
Potential Risks and Economic Headwinds
While the mood is overwhelmingly positive, the report includes a significant warning. The same conditions fueling the rally could also lead to a sharp and sudden decline. Ostlund noted the possibility of "a FOMO driven rally going into year end."
However, he cautioned that this environment creates specific risks. "While almost all indicators point up, this setup also increases the probability of rapid unwinds down the road. Buyers beware," he stated.
Many investors appear to be shrugging off potential macroeconomic challenges. The report notes that despite a "bifurcated economy," with AI excitement on one side and a weakening labor market on the other, investors seem largely unconcerned.
Furthermore, most investors surveyed expect growth to re-accelerate in 2026 and are comfortable with the prospect of just two more interest rate cuts from the central bank this year. This outlook suggests a high tolerance for risk and a strong belief that the AI trend will override other economic factors.
