The standoff between the AI Agent wave and climbing US Treasury yields is splitting the US stock market into two very different worlds.
This week, Meta launched its Agentic AI model Muse, adding US$220 billion to its market value in a single week and driving the Nasdaq 100 to become the strongest performer among major indices. At the same time, however, Treasury yields kept rising, pushing rate-sensitive assets to lows — the Russell 2000 lagged significantly, and the S&P 500 repeatedly struggled around the 7,700 level without managing a decisive breakout.
The internal divergence in the market has reached an extreme degree. Excluding AI-related names, the S&P 500 actually fell about 1% this week; the number of stocks hitting new lows on the New York Stock Exchange exceeded those hitting new highs for nine consecutive trading sessions, the longest such streak since October 2023.
Tony Pasquariello, head of global hedge fund business at Goldman Sachs, described the current situation as a "frustrating game of cat and mouse" between the stock market and the rates market, and offered a clear recommendation: if investors insist on holding long equity exposure, they should simultaneously short Treasuries to hedge interest rate risk.
AI Agents Spark a Structural Rally, Market Cap Concentration Hits a Record
Meta's Muse model became the biggest catalyst of the week. The launch of this Agentic AI product added US$220 billion to Meta's market value in a single week, pushing its total market capitalization back above the US$2 trillion mark and lifting the entire AI supply chain — semiconductor stocks led gains on the hardware demand pull from the "inference economy," while Agentic AI-related names benefited broadly. Goldman Sachs' Agentic AI basket index (ticker GSXUAGNT) rose accordingly, and the high-beta momentum basket notched nine consecutive sessions of gains.
Rich Privorotsky, a senior trader at Goldman Sachs, pointed out that Muse is only the first among many entrants, and that competing products from Google and OpenAI will appear in the coming weeks and months. He believes that as large enterprises take on security, infrastructure and distribution functions, a great deal of economic friction and intermediary layers will be eliminated, which is itself a productivity gain and is structurally disinflationary, with a positive combined effect on the overall stock market.
Worth noting is that market cap concentration in US equities has climbed to a historic extreme. Pete Callahan, chief technology analyst at Goldman Sachs, noted that there are now 10 US TMT companies in the S&P 500 with market capitalizations above US$1 trillion, compared with just three only three years ago, when the AI cycle was beginning.
Severe Internal Divergence, the "Diffusion Trade" Is Declared Over
Behind the AI rally is a sharp deterioration in market breadth. Technology was the lone standout sector this week, while energy and financials both lagged; the Mag7 (the seven mega-cap technology giants) gained nearly three times as much as the other 493 S&P 500 constituents. ZeroHedge, citing data, noted that the "diffusion trade" exists in name only — the number of NYSE stocks hitting new lows exceeded new highs for nine straight days, the longest streak in nearly three years.
At the same time, divergence has also appeared within the AI trade. AI power-related stocks weakened this week, moving in almost perfect negative correlation with the probability of Democrats winning the House in the US midterm elections — the market fears that if Democrats control the House, existing and future data center construction projects could be shelved indefinitely, posing a potential drag on US AI infrastructure investment.
In addition, credit spreads for hyperscalers widened noticeably this week, while their equity valuations remained elevated. Goldman Sachs noted that the divergence between hyperscaler credit risk and Nasdaq implied volatility has widened to abnormal levels, and the gap between the two is worth watching.
Treasury Yields Are the Biggest Hurdle, the S&P 500's 7,700 Level Keeps Rejecting
The continued rise in Treasury yields was the core variable capping a breakout this week. After consolidating around the 7,700 level for two months, the S&P 500 showed signs of an upward breakout on Tuesday, but was immediately hit hard by the bond market and fell back to its starting point that same evening.
Pasquariello described the situation as a "frustrating game of cat and mouse" between the stock market and the rates market: whenever stocks try to break out, rates jump in response, suppressing risk appetite; and the rise in rates, by tightening financial conditions, directly weighs on rate-sensitive assets. The Russell 2000 has underperformed the S&P 500 for six consecutive weeks, and Goldman Sachs acknowledged that small caps are facing persistent selling from long-only funds and wealth management channels, with technicals also breaking down.
On valuations, research from Goldman Sachs' US equity strategy team shows that the market has already applied a degree of discount to the sustainability of AI infrastructure earnings growth — the median forward price-to-earnings ratio for AI infrastructure stocks has fallen from 32 times in April 2026 to 22 times currently, meaning some pessimistic expectations have already been priced in.
Goldman Sachs: Hold Stocks Only With a Hedge, a Breakout Still Needs a Catalyst
Faced with this fractured landscape, Pasquariello offered a clear operational framework: to hold meaningful long equity exposure, investors need to simultaneously establish a simple short Treasury position as a hedge. He rated current speculative long positioning in the market at +3 on a standard scale of -10 to +10, arguing that overall positioning is not crowded.
He also noted that buyback activity is slowing, new share issuance is rising, and US retail investors are turning cautious, meaning the current market structure is not perfect. But he acknowledged that, given how violent the recent move in rates has been, the stock market's ability to hold on to most of its gains is itself no small feat.
Pasquariello's conclusion: if a catalyst for an upward breakout emerges, fast money will have to chase into the rally quickly; but until then, the tug-of-war between stocks and rates will continue, and ZeroHedge added one final word to that — "yet."
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