The global market is currently navigating an unusual period characterized by high noise and rapid capital flows, creating a level of chaos that is perplexing even the most seasoned traders. Tony Pasquariello, head of hedge fund coverage at Goldman Sachs, remarked that it is difficult to recall a time, outside of major crises like the global financial crisis or the COVID-19 pandemic, when the market environment has been so "extremely open" and unpredictable. In his latest report, he issued a warning: no one truly knows how this will all conclude.
The core anxiety in the market stems from an intense clash between two opposing narratives surrounding artificial intelligence. On one side, the market perceives that the disruptive risks brought by AI are extending over a longer timeframe, triggering aggressive selling in sectors seen as potential "victims." On the other side, investors are beginning to question whether the returns on AI-related capital expenditures will be sufficiently attractive. This inherent tension is causing significant volatility—any perception of marginal AI risk can trigger exceptionally fierce selling.
Currently, the S&P 500 has stalled just below the 7000-point mark this year, failing to achieve a decisive breakout. Beneath the index's calm surface, undercurrents are turbulent. Goldman Sachs' "AI Leaders vs. Laggards" pair trade recorded its largest single-day gain in history last week, primarily driven by shorting the "laggards." This "shoot first, aim later" shorting sentiment is causing dramatic narrative shifts and risk transfers within core sectors like software.
Simultaneously, due to crowding and valuation pressures in U.S. stocks, a subtle but significant shift in global capital allocation is underway. As the narrative in the U.S. domestic market becomes more complex, incremental funds are accelerating their flow overseas. South Korean and Japanese stock markets have shown strong performance recently. Notably, South Korea's KOSPI index, driven by its "Corporate Value-up Program" and robust earnings expectations, has not only doubled since late 2024 but also recently posted its best weekly performance in five years, indicating that investors are seeking new growth havens outside the U.S.
Conflicting Signals: An Extremely Challenging Trading Environment The current market environment is filled with contradictory signals, making investment exceptionally challenging. Tony Pasquariello pointed out that the market is simultaneously buying cyclical assets (like industrial and materials stocks) and defensive assets (such as consumer staples and utilities), a "hedging bets" phenomenon that is extremely rare.
Similar contradictions exist between commodities and interest rate markets: prices for commodities like metals are being bid up, suggesting economic strength; yet, U.S. interest rates are falling and the yield curve is flattening, which typically signals an economic slowdown. Goldman Sachs technology expert Pete Callahan believes this underlying volatility and mixed signals make it exceptionally difficult to discern the market's true conviction and predict which narrative might shift next.
The AI Narrative Battle: Value Creation vs. Value Destruction The core debate in the market centers on AI's fundamental impact: Who are the beneficiaries, and who are the victims? Is it about value creation or value destruction? Does it favor capital-light or capital-heavy models? This intense debate is directly causing realized volatility to surge for related individual stocks and thematic baskets.
As the "epicenter" of market narratives, the software industry's performance is particularly telling. While the index level may appear calm, beneath the surface, the punishment for AI "laggards" is relentless. As more sub-sectors come under scrutiny, market participants' concerns about AI's disruptive risks are intensifying.
Furthermore, as AI infrastructure construction advances, power demand has emerged as a new complicating variable. Goldman Sachs research indicates that the strain AI places on power grids is translating into concrete macroeconomic spillover effects. This is also causing a stock basket related to U.S. grid modernization to show clear signs of stress.
Capital Flow Reversal: U.S. Stagnation vs. Asian Vitality While U.S. stocks failed to break through key resistance levels even after the release of non-farm payroll and CPI data, overseas markets have experienced a surge. Data from Goldman Sachs strategist Ryan Hammond shows that non-U.S. stock funds have attracted $89 billion in inflows year-to-date, compared to just $16 billion for U.S. stock funds. This does not necessarily mean investors are directly selling U.S. stocks, but rather that marginal incremental capital is being prioritized for non-U.S. markets.
The South Korean stock market has become a leader in this trend. The MSCI Korea Index is up 28% year-to-date in U.S. dollar terms. Tim Moe, Goldman Sachs' chief Asia Pacific equity strategist, maintains an Overweight rating and has raised his KOSPI index target to 6400 points. He cites four key reasons: first, astonishing earnings growth, expected to be 120% in 2026 following 36% growth in 2025; second, highly attractive valuations, with forward P/E ratios still below long-term averages; third, low foreign ownership; and fourth, substantive progress in corporate governance reforms.
The Japanese market has also performed strongly, with the Nikkei index recently rising 5%. Notably, the traditional logic linking the Japanese stock market and currency appears to have "flipped": whereas a weak yen used to correlate with a strong stock market, the current pattern involves a stronger yen and lower interest rates, yet the stock market continues to rise. This suggests the Japanese market may be transitioning from a "weak yen trade" to a healthier "reflation trade."
Hedge Fund Resilience and Outlook Despite the uncertain macro environment, hedge funds have demonstrated remarkable resilience. According to Tony Pasquariello's observations, macro discretionary funds built significant profit cushions in January, and both fundamental and quantitative equity long-short strategies have generally managed to sidestep major risks.
Looking ahead, market trends appear to favor active management over passive investing, and liquid assets over illiquid ones. In this market filled with "noise" and "high velocity," strategies capable of nimbly adapting to shifting narratives seem to be gaining the upper hand.