Goldman Sachs Partner: Market Enters Digestion Phase, Small-Cap Outperformance Hits Largest Spread Since 2003
N.R. Finch
Goldman Sachs macro trader Bobby Molavi says U.S. equities are entering a digestion-and-rotation phase after rallying over 50% since "Liberation Day." The Russell 2000 now leads the S&P 500 by roughly 1,240 basis points year-to-date — on track for the widest small-cap outperformance since 2003 — as capital rotates from mega-cap tech into defensives, value, and small caps.
What is the market "digesting"?
The Nasdaq fell on four of five trading days last week, ending down 4.5%. The Russell 2000 rose about 1%, the S&P 500 dropped roughly 2%, and European equities outperformed Asia.
This means → the headline index is still near highs, but the market underneath has split. Money is not leaving — it is changing seats.
Goldman's internal flow data confirms a clear shift toward defensives, value, and small caps. Molavi calls it "broadening, softening, and rotation everywhere."
Why are small caps outperforming by this much?
The Russell 2000 leads the S&P 500 by roughly 1,240 basis points year-to-date. If that gap holds through year-end, it will be the widest small-cap outperformance since 2003.
In plain terms = the small-company stocks crushed by mega-cap tech for two years are finally fighting back — and at the strongest pace in more than two decades.
This reflects a market starting to question the "just buy big tech" thesis, forcing capital to look for returns across a broader set of names.
How far have the tech leaders actually fallen?
Coinbase, Oracle, Salesforce, ServiceNow, Netflix, Palantir, Microsoft, Meta, ARM, and Broadcom have each pulled back 25% to 70% from their respective all-time highs.
The hyperscalers — Amazon AWS, Microsoft Azure, Google Cloud and peers — fell roughly 18% collectively in June. The "Magnificent Seven" continue to lag the broader market on both absolute and relative returns.
Oracle posted its worst week since 2001. This means → even with headline indices near highs, last cycle's leaders are already deep in correction territory.
Can AI still be invested in?
Storage remains a bright spot: SanDisk, Western Digital, and Micron have risen 8× to 40× over the past twelve months. Micron surged about 15% in a single day after an earnings beat — but this came during a week when AI names broadly sold off.
In plain terms = AI has not gone dark across the board. It is splitting: storage — closest to real hardware spending — keeps rallying, while software platforms further from monetization fell first.
The market is debating "token maximization" versus "token rationalization." Apple (iPhone) and Microsoft (Xbox) have begun passing AI costs to consumers through price hikes; some companies are openly discussing the need to curb token consumption.
Where is hedge-fund money going?
Goldman Prime data shows hedge-fund gross leverage at an all-time high. Funds are selling U.S. assets while adding to Asia (ex-China).
Net-long positioning has migrated from semiconductors → power/compute/data centers → storage. The storage net-long is roughly twice the combined size of the other three legs.
Year-to-date strategy returns run about 14% to 18%, with a meaningful share of profits coming from non-AI sectors and non-U.S. markets. This reflects that even the most aggressive institutional capital is actively diversifying its bets.
What happens in July?
Molavi poses the key question: can the Nasdaq's customary monthly positive return continue into July, or will broadening and laggard catch-up dominate?
Put simply = it is a tug-of-war between "can the old leaders stabilize?" and "can the new rotation take the baton?"
The outcome will be a critical style-verification point for the next phase — if small caps and value keep winning, the style shift may prove to be trend, not noise.
Content is for reference only, not financial advice.