"Under the surface, there were some really important debates that equity investors are having right now and some really... key tensions." - Shawn Tuteja (00:36)
"Wednesday, February 4th... was the worst performance day for those communities since Covid." - Shawn Tuteja (05:20)
"It was the largest shorting of US single stocks ever in the history of our Prime data since the beginning of 2016." - Shawn Tuteja (05:39)
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"Whenever you have a friendly growth environment with potentially lower rates, it's really hard to fight US equities." - Shawn Tuteja (08:03)
Executive Summary
In this episode of "The Markets," host Chris Hussey and Shawn Tuteja (Head of ETF & Custom Baskets Volatility Trading) discuss a significant disconnect in the markets: while headline indices remain relatively flat, there is violent rotation and volatility occurring under the surface. Tuteja argues that the market is grappling with three key tensions: the broadening of the rally beyond Big Tech, the resurgence of international equities, and skepticism regarding the Return on Invested Capital (ROIC) for the massive $700 billion AI CapEx spend. Despite a recent "flush" in positioning where investors were caught "over their skis," the speakers maintain a bullish outlook, suggesting the bull market trend remains intact due to strong earnings growth (11%) and a friendly macro backdrop.
Key Takeaways
The Rally is Broadening: The Mag 7 and Nasdaq are underperforming Small Caps (Russell 2000) and Cyclicals, signaling investor confidence in an economic reacceleration.
Massive Capital Rotation: Last week saw the largest selling of US equities since April of last year and the largest shorting of single stocks since 2016, indicating a major positioning reset.
AI "Phase 4" has Arrived: The trade is shifting from "picks and shovels" (semiconductors) to AI Productivity—non-tech companies using AI to improve margins.
International Resurgence: Capital is flowing aggressively into international markets, with South Korea’s Kospi up 23% YTD, driven by AI memory trades.
Valuation Reset in Software: Software multiples have collapsed from 35x to 20x forward PE, raising questions about whether AI will disrupt or benefit legacy software.
Macro Backdrop Remains Friendly: With GDP tracking north of 3%, earnings growing at 11%, and potential rate cuts, the fundamental bull trend is supported despite volatility.
Chris Hussey introduces the session, noting significant volatility under the surface despite a calm start to the week. Shawn Tuteja highlights that while the S&P 500 is up modestly YTD, deep tensions are brewing. He notes that for the first time in years, the Mag 7 playbook is failing, with the Nasdaq significantly underperforming the Russell 2000 to start the year.
The market is debating whether the rally is finally broadening out. Tuteja points to data suggesting the economy is accelerating rather than slowing, citing an ISM print over 52 and GDP expectations north of 3%.
The Shift: Investors are moving money into cyclical sectors; Industrials alone rose 4% last week.
The Question: Investors are wrestling with whether to allocate away from legacy tech winners into cyclical sectors that benefit from a strong real economy.
01:43 – Tension 2: US Exceptionalism vs. Global Opportunities
There is a growing debate on whether investors should be allocated to the US at all. Tuteja notes massive outperformance in international markets:
Emerging Markets, Japan, and specifically Korea (driven by AI memory chips) are seeing significant inflows.
This challenges the long-standing US Exceptionalism trade.
The third and most critical tension involves the Artificial Intelligence trade. The hyperscalers (Mag 7) reported earnings and are projected to spend $700 billion in CapEx this year—effectively their entire free cash flow.
ROI Concerns: Investors are questioning the Return on Invested Capital (ROIC). While this spend benefits semiconductor stocks immediately, the long-term payoff is under scrutiny.
Software Correction: A massive re-rating has occurred in the software sector, with valuations crashing from 35x to 20x forward earnings in just months.
Tuteja addresses the US Exceptionalism trade through the lens of precious metals. Gold and Silver saw a massive run-up in January due to geopolitical fears and dollar debasement theories.
The Reversal: The trade turned into a speculative "greed chase" with leveraged products. This unwound violently in late January.
The Lesson: This was a precursor to the broader equity market volatility—a sign that positioning was too aggressive and needed a washout.
Tuteja reveals startling data about market positioning. Last week was one of the most difficult trading environments in his career, comparable to the Volmageddon of 2018 or the onset of Covid.
Wednesday, Feb 4th: This was the worst performance day for Quant and Multi-strat hedge funds since the onset of Covid.
Record Selling: Prime brokerage data showed the largest selling of US equities since tariffs were introduced last year, and the largest shorting of single stocks since 2016.
Interpretation: The market was over its skis. This was a necessary risk reduction event to lower portfolio variance, not a fundamental break in the bull market.
Despite the volatility, Tuteja remains bullish. He introduces the concept of Phase 4 of the AI trade.
Phases 1-3: These were the "picks and shovels" (chips, infrastructure, models).
Phase 4 (Productivity): This involves non-tech companies (Banks, Retailers, Logistics) adopting AI to lower costs and increase margins.
Performance: The Goldman Sachs AI Productivity basket is up 9% YTD, outperforming the broad market.
Data & Figures
Data Point
Value
Context
Russell 2000 Performance
+6%
YTD performance, outperforming Nasdaq.
Nasdaq Performance
+2%
YTD performance, underperforming Small Caps.
GDP Forecast
>3%
Projected US GDP, indicating reacceleration.
ISM Print
52.x
Indicates economic expansion (vs contraction).
Industrials Sector
+4%
Gain in a single week (last week).
Emerging Markets
+6%
Average YTD gain.
Nikkei (Japan)
+9%
YTD gain.
Kospi (Korea)
Stories & Anecdotes
The "Quant Quake" of Feb 4th: Tuteja recounts Wednesday, February 4th, as a traumatic day for quantitative and hedge fund strategies. He compares the difficulty of the trading environment to historic stress events like the 2018 volatility implosion or the start of the Covid pandemic.
The "Over Their Skis" Metaphor: Used repeatedly to describe investor positioning. The narrative is that the market fundamentals didn't break, but investors had simply leaned too far forward into momentum trades and leveraged positions.
The Gold Rush Analogy: Used to explain the evolution of the AI trade. We have passed the phase of selling "picks and shovels" (Nvidia/Semis) and are now entering the phase of finding the actual gold (companies using the tools to make money).
References & Recommendations
People Referenced:
Chris Hussey: Host, Goldman Sachs Research.
Shawn Tuteja: Guest, Head of ETF & Custom Baskets Volatility Trading.
Platforms & Products:
Goldman Sachs Prime Data: Proprietary internal data used to track hedge fund positioning.
GS AI Productivity Basket: Specific basket tracking non-tech companies adopting AI.
Actionable Next Steps
Invest in "Phase 4" AI: Shift focus from AI hardware manufacturers to AI adopters—specifically in sectors like banking, retail, and logistics.
Monitor Bond Yields: Tuteja warns that the bullish thesis breaks if 10-year yields spike rapidly above 5%.
Rotate into Cyclicals: With the economy accelerating (ISM > 52), consider increasing exposure to Industrials and Small Caps.
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+23%
YTD gain, driven by AI memory trade.
Mag 7 CapEx Spend
$700 Billion
Projected 2026 spend by top 4 hyperscalers.
Software Valuation Drop
35x → 20x
Forward PE compression in recent months.
S&P 500 Return (AI)
+85%
Return since start of ChatGPT with AI names.
S&P 500 Return (ex-AI)
~31%
Return since start of ChatGPT excluding AI names.
Earnings Growth
11%
Current year-over-year earnings growth (vs 7% consensus).