"Agent vs US Treasuries" — Who Will Dominate the US Stock Market?

Author: Zhao Ying

The clash between the AI Agent wave and rising US Treasury yields is tearing the US stock market into two distinctly different worlds.

This week, Meta launched its Agentic AI model Muse, which saw a staggering $220 billion increase in market capitalization in just one week, propelling the Nasdaq 100 index to become the strongest performing major index. However, at the same time, US Treasury yields continued to rise, pushing interest-sensitive assets into a trough — the Russell 2000 index significantly lagged, while the S&P 500 index struggled around the 7700-point mark, failing to achieve a decisive breakthrough.

The internal division of the market has reached an extreme level. Excluding AI-related stocks, the S&P 500 actually fell by about 1% this week; the number of new lows on the NYSE has exceeded new highs for nine consecutive trading days, marking the longest consecutive decline since October 2023.

Tony Pasquariello, head of Goldman Sachs' global hedge fund business, characterized the current situation as a "frustrating cat-and-mouse game between the stock market and the interest rate market," and provided a clear recommendation: if one insists on holding long positions in stocks, they should simultaneously short US Treasuries to hedge against interest rate risk.

AI Agents Ignite Structural Market Trends, Market Capitalization Concentration Hits New Highs

Meta's Muse model has become the biggest catalyst in the market this week. The launch of this Agentic AI product led to a $220 billion increase in Meta's market capitalization in just one week, bringing its total market cap back to the $2 trillion mark and boosting the entire AI industry chain — the semiconductor sector led the charge due to increased hardware demand from the "inference economy," with AI-related stocks collectively benefiting. The Goldman Sachs Agentic AI basket index (code GSXUAGNT) also rose, while the high-beta momentum basket recorded nine consecutive trading days of gains.

Rich Privorotsky, a senior trader at Goldman Sachs, pointed out that Muse is just the first among many entrants, and competing products from Google and OpenAI will emerge in the coming weeks and months. He believes that as large companies take on security, infrastructure, and distribution functions, a significant amount of economic friction and intermediaries will be eliminated, which in itself is a productivity boost and structurally has an effect of suppressing inflation, positively impacting the overall stock market.

It is noteworthy that the concentration of market capitalization in the US stock market has surged to historical highs. Pete Callahan, Goldman Sachs' chief technology analyst, noted that there are currently 10 US TMT companies in the S&P 500 with market capitalizations exceeding $1 trillion, compared to only three just three years ago when the AI cycle began.

Severe Internal Market Divergence, "Diffusion Trading" Declares Its End

Behind the frenzy of the AI market is a sharp deterioration in market breadth. This week, the technology sector stood out, while the energy and financial sectors lagged; the gains of the Mag7 (the seven tech giants) were nearly three times that of the remaining 493 stocks in the S&P 500. ZeroHedge cited data indicating that "diffusion trading" is virtually dead — the number of new lows on the NYSE has exceeded new highs for nine consecutive days, setting the longest record in nearly three years.

At the same time, there has also been divergence within the AI market. AI power-related stocks showed weak performance this week, with their movements almost perfectly negatively correlated with the probability of the Democratic Party winning the House of Representatives in the upcoming US midterm elections — the market is concerned that if the Democrats control the House, existing and future data center construction projects may face indefinite delays, which could pose a potential suppression on US AI infrastructure investment.

Additionally, the credit spreads of hyperscale cloud computing companies widened significantly this week, while their stock valuations remained high. Goldman Sachs noted that the divergence between the credit risk of hyperscalers and the implied volatility of the Nasdaq has expanded to an abnormal level, and the gap between the two is worth monitoring.

Rising US Treasury Yields Become the Biggest Roadblock, S&P 7700 Mark Faces Repeated Resistance

The continuous rise in US Treasury yields is the core variable suppressing market breakthroughs this week. After consolidating around the 7700-point mark for two months, the S&P 500 index showed signs of a breakout on Tuesday but was immediately met with a "head-on blow" from the bond market, falling back to its original point that evening.

Pasquariello described this situation as a "frustrating cat-and-mouse game between the stock market and the interest rate market": whenever the stock market attempts to break through, interest rates jump, suppressing risk appetite; and the rise in interest rates directly pressures interest-sensitive assets by tightening financial conditions. The Russell 2000 index has underperformed the S&P 500 for six consecutive weeks, and Goldman Sachs admitted that small-cap stocks have faced continuous selling from long-term funds and wealth management channels, with technical levels also breaking down.

In terms of valuation, research from Goldman Sachs' US equity strategy team shows that the market has already priced in a certain degree of discount regarding the sustainability of profit growth in AI infrastructure — the median forward P/E ratio of AI infrastructure stocks has fallen from 32 times in April 2026 to the current 22 times, with some pessimistic expectations already digested.

Goldman Sachs: Hold Stocks with Hedging, Breakthroughs Still Need Catalysts

In the face of the aforementioned tearing pattern, Pasquariello provided a clear operational framework: if one wants to hold significant long exposure in stocks, they should simultaneously establish simple short positions in US Treasuries to hedge. He rated the current speculative long positions in the market on a standard scale of -10 to +10 as +3, believing that the overall position is not crowded.

He also pointed out that buyback efforts are slowing, new stock issuance is increasing, and retail investors in the US are tending to be more cautious, indicating that the current market structure is not perfect. However, he acknowledged that considering the recent fierce movements in interest rates, it is already quite remarkable that the stock market has managed to hold onto most of its gains.

Pasquariello's conclusion is: if a catalyst for an upward breakthrough appears in the market, fast money will have to rush in to chase the rally; but until then, the game between the stock market and interest rates will continue, and ZeroHedge added the final word — "yet."

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