Goldman Sachs noted that the global bull market has not ended, but the driving forces have shifted: capital is moving from overcrowded U.S. technology stocks to emerging markets, commodities, and value stocks. While AI continues to sustain high capital expenditures (Capex), concerns over return on investment (ROI) are intensifying, with significant divergence within the Magnificent Seven (Mag7) and a valuation reset occurring in the software sector. Constraints in data centers and energy supply are becoming apparent, benefiting 'old economy' sectors such as utilities, while tangible assets and value-oriented styles are experiencing revaluation, underscoring the rising importance of diversified allocation.
If you are still blindly buying into the narrative of 'U.S. tech dominance,' it is time to wake up. Goldman Sachs' latest global strategy report reveals a paradigm shift that is currently underway: while the bull market has not yet ended, the driving force has completely changed.
Goldman Sachs analyst Peter Oppenheimer and his team issued a research report pointing out that the long-standing era of 'financial assets' outperforming 'physical assets' is reversing. In 2025, the U.S. market lagged behind other major global markets for the first time, with emerging markets making a strong comeback. The global market is in a distinct late-cycle 'optimism' phase, but significant internal divergence is occurring.
Asset Rotation: Capital is flowing from overcrowded U.S. technology stocks to emerging markets (EM), commodities, and 'old economy' value stocks.
AI Disillusionment and Divergence: Despite AI capital expenditures reaching $659 billion, anxiety over return on investment (ROI) is spreading. The Mag7 no longer move in unison, with significant divergence in internal performance.
Software Industry Crisis: The emergence of AI agents is seen as disruptive to the traditional SaaS model, leading to a sharp decline in software sector valuations.
Physical Assets Reign Supreme: The growth of the virtual world is now constrained by the physical world (energy, data centers), driving a surge in capital expenditures (Capex) for utilities and capital-intensive industries, thereby increasing the value of physical assets.
The Global Bull Market Continues, but U.S. Stocks Are No Longer the Sole Protagonist.
In 2025, a historic shift occurred quietly. Although $S&P 500 Index (.SPX.US)$ performance remained robust, the U.S. market lagged behind other major markets both in local currency and dollar terms.
Data shows that the European STOXX 600 Index, Japan's Topix Index, and the MSCI Asia Pacific (excluding Japan) Index all outperformed the S&P 500.
More striking is the 'turnaround' in emerging markets. Emerging markets, which have underperformed for a long time, are seeing a significant revaluation relative to developed markets.$MSCI Emerging Markets Index (.MXEF.US)$Since the beginning of 2025, its performance index relative to developed markets has risen from 100 to nearly 120.
Analysts at Goldman Sachs believe that this trend is driven by an improved combination of macro and micro factors, and relative valuations remain attractive, suggesting that this momentum will continue.
Markets overlook policy uncertainty as earnings growth remains robust.
Despite frequent geopolitical events and a surge in policy uncertainty, equities have shown remarkable 'complacency,' almost entirely ignoring these risks. This resilience is primarily attributed to strong fundamentals:
Global economic confidence has strengthened, with cyclical sectors outperforming defensive sectors.
Profit growth of U.S. companies remains robust, with growth in this fiscal quarter reaching over 12%, exceeding market consensus by five percentage points and marking the fifth consecutive quarter of double-digit growth.
This round of growth is no longer dominated solely by large technology stocks. The median year-over-year growth of S&P 500 component companies reached 9%, with 59% of companies surpassing expectations.
In a rare move, analysts raised their full-year 2026 earnings forecasts as early as the first quarter, a trend particularly pronounced in emerging markets.
The AI Capex Boom and Internal Fragmentation of the 'Magnificent Seven'
This is the most alarming signal for technology investors: the AI wave is shifting from 'universal prosperity' to 'brutal differentiation.'
Market expectations for AI hyperscalers' capital expenditures in 2026 have been revised upward to $659 billion, representing a 60% increase from 2025. Despite the absolute value rising, growth is expected to slow compared to last year.
However, such massive investments have raised investor concerns about whether sufficient returns can be generated. This has caused a slowdown in the rate of return for tech stocks, with the 'Magnificent Seven' experiencing a year-on-year decline in returns: surging 75% in 2023, dropping to around 50% in 2024, and falling below 25% by 2025.
Meanwhile, the 'Magnificent Seven' are no longer moving in lockstep. In 2025, $Alphabet-C (GOOG.US)$ one company's return reached approximately 66%, contributing 15% to the S&P Total Return; while $Microsoft (MSFT.US)$ 、 $Meta Platforms (META.US)$ and $Tesla (TSLA.US)$ another saw only low double-digit returns; $Apple (AAPL.US)$ and $Amazon (AMZN.US)$ yet another dropped to single digits, underperforming the broader market. The correlation between the giants' stock prices has plummeted sharply.
The Software Industry’s 'Darkest Hour': Backfiring of AI
The AI innovation wave is not only creating fragmentation among hyperscale enterprises but also posing a disruptive threat to existing tech companies.
The launch of new agent platforms such as Anthropic's Claude Cowork and OpenAI's Frontier has sparked concerns about the disruption of other technology business models, particularly in the software sector.
Entering 2026, market expectations for the software sector have reached their highest level in at least 20 years, with a consensus expectation of 15% two-year forward revenue growth, more than double the 6% expected for the median company in the S&P 500.
However, last week, the U.S. software sector plummeted by 15% (nearly 30% below its September peak), reflecting a significant downward revision by investors in record-high profit margins and growth expectations. This valuation reset marks a fundamental reassessment of the growth prospects for the software sector.
The Return of 'Physical' Assets: The Revival of the Old Economy
A profound shift is underway: For the first time in the 25 years since the commercialization of the internet, the growth prospects of the technology sector significantly depend on physical assets—data centers and energy supply.
As hyperscale enterprises experience a surge in capital expenditure, this spending is spilling over into other industries, particularly sectors like utilities that are building infrastructure, while the future growth of dominant tech giants increasingly relies on these infrastructures.
Data shows that the capital expenditure-to-sales ratios of developed-market utilities, telecommunications, and commodity producers are all rising. These "old economy" sectors had been in a state of capital expenditure scarcity since the financial crisis due to overcapacity and historically low returns.
AI infrastructure investment, coupled with a renewed boost in defense spending, is reigniting the investment returns of many long-lagging physical assets at a time when investors fear that returns in the technology sector are slowing from record highs. This has led to a significant decline in the valuation premium of capital-light enterprises relative to capital-intensive businesses.
The 'Comeback' of Value Stocks: From Value Traps to Value Creators
The reassessment of growth rates in some technology sectors, combined with persistent inflation and higher real interest rates, has rekindled investor attention toward long-neglected opportunities in value stocks.
These stocks were once widely regarded as "value traps," but some are successfully transforming into "value creators" by generating higher cash flows and returning more capital to shareholders through dividends and buybacks.
The 12-month forward price-to-earnings premium of growth stocks over value stocks has declined in the United States, Europe, Japan, emerging markets, and globally.
Since early 2025, the performance patterns of financial assets versus real assets have undergone a significant reversal: gold, emerging markets, the Topix index, industrial metals, and value stocks have performed the best, contrasting sharply with the Nasdaq-, S&P 500-, and tech stock-dominated landscape from the post-financial crisis era to the end of the pandemic.
The advent of an era of diversified allocation
The era from the post-financial crisis period to the end of the pandemic was dominated by exceptional technology-driven growth and zero-interest-rate policies, driving a record gap between financial asset returns and real asset returns.
Abundant liquidity and historically low capital costs meant that investments with the longest duration—Nasdaq, S&P 500, and tech stocks—performed the best. From 2009 to 2020, the Nasdaq surged over 900%, while prices in the real economy such as commodities, wages, and GDP saw limited increases.
However, the current landscape has shifted significantly. Despite robust U.S. corporate earnings growth—this quarter showing a 12% increase, surpassing consensus expectations by five percentage points, with median S&P companies growing 9% year-over-year and 59% of companies exceeding expectations—the sources of growth are broadening.
More importantly, full-year 2026 expectations were unusually revised upward in the first quarter, with a larger adjustment for emerging markets.
Goldman Sachs believes that equities may still be the best-performing asset class, but the drivers and return opportunities are fundamentally expanding. While overall index returns may slow, there are more diversification opportunities, offering better prospects for risk-adjusted returns and alpha generation. Investors need to reassess long-standing allocation inertia and achieve broader diversification across regions, sectors, and style factors to seize the opportunities presented by this era of market transformation.
Editor/Doris
