Consumer confidence hits rock bottom, and macroeconomic correlations collapse simultaneously. How much longer can the US stock market's solo celebration last?

Writing: Li Jia

Source: Wall Street Journal

Currently, the U.S. stock market is showing a rare disconnect: on one side, consumer confidence has fallen to historic lows, and macro asset correlations are completely distorted; on the other side, driven by AI and semiconductor rallies, major indices continue to hit new all-time highs. The market’s real concern is no longer whether the rally can continue, but how long this highly concentrated AI boom can withstand shocks from oil prices, interest rates, and crowded positions.

Supported by rising expectations for U.S.-Iran talks and a surge in the semiconductor sector, U.S. stocks hit a new high again on Tuesday. The Nasdaq 100 index broke through 30,000 points for the first time, with the S&P 500 rising about 0.5%; meanwhile, falling oil prices pushed U.S. Treasury yields down, and a rebound in the dollar suppressed gold and Bitcoin performance.

Semiconductors remain the core driver of this rally. After UBS sharply raised its target price for Micron Technology, trading sentiment for memory chips quickly heated up, with the semiconductor sector rising a total of 14% over the past five days. However, Nvidia has begun to underperform the overall semiconductor index, indicating that funds are shifting from the leader to higher-elasticity sectors within semiconductors.

Goldman Sachs trader Nelson Armbrust warned that the current correlations between the S&P 500 and rates, gold, VIX, and oil have deviated from their 20-year historical averages and entered extreme zones. “The market always has one side to give in,” he said, “the S&P 500 index does not reflect the full reality of the market.”

AI remains the main theme, but the driving forces are rotating

The strongest current driver in the stock market comes from semiconductors, especially storage chips. Goldman Sachs trader Pete Callahan pointed out that the semiconductor index has outperformed Nvidia by about 16.5 percentage points over the past five trading days, marking the largest five-day advantage of SOX relative to Nvidia since 2018.

Notably, this rally is not driven by large tech stocks across the board. Large tech stocks overall performed relatively weakly, with Nvidia slightly lagging, indicating that funds are shifting from AI leaders to more elastic sectors within semiconductors. Storage chip-related stocks opened strongly, with the daily nominal trading volume of DRAM ETFs reaching about $3 billion, and the Goldman Sachs Meme-Stocks basket also saw significant gains.

AI remains the market’s main theme. AI semiconductors, Agentic AI, and AI data center sectors led the market rally. Goldman Sachs stated that the momentum factor on that day was almost entirely driven by bullish traders, with the best-performing stocks over the past 12 months continuing to significantly outperform.

Meanwhile, options markets are also showing increasingly extreme structural signals. SpotGamma data shows aggressive negative delta flows in 0-DTE options, mainly driven by selling call options; the “volatility rising, spot prices increasing” combination continues. This suggests that the current rally is not a typical low-volatility expansion driven by risk appetite, but increasingly influenced by position squeezes and options trading structures.

Consumer confidence hits bottom, but behaviors and perceptions diverge

Goldman Sachs trader Chris Hussey pointed out that many are wondering: why are consumer confidence indicators at historic lows, yet U.S. stocks keep hitting new highs? His explanation is that the “perceived” and “actual behavior” of consumers are inconsistent. In other words, although sentiment is pessimistic, consumer spending behavior has not deteriorated in tandem.

At the same time, fiscal stimulus continues to support household cash flow. Hussey mentioned that tax cuts from last July’s budget are improving household balance sheets and partially offsetting the pressure from rising gasoline prices.

U.S. macro data also show clear divergence. The Chicago Fed National Activity Index rebounded sharply, the Conference Board Consumer Confidence Index exceeded expectations, and the Dallas Fed Manufacturing Index performed steadily; meanwhile, the S&P CoreLogic Case-Shiller home price index weakened, and the Philadelphia Fed Manufacturing Index underperformed. Overall, U.S. economic data still remain “slightly stronger than expected.”

This also explains the market’s contradictions: consumer sentiment is extremely low, but economic data have not shown clear signs of weakening, and actual consumption behaviors have not declined in sync. However, the AAII bull-bear spread remains negative, indicating that investor sentiment has not truly shifted to optimism despite the new highs in stock indices.

Correlation breakdown and negative Gamma intensify: Goldman warns of structural cracks in the U.S. stock market

Goldman Sachs trader Nelson Armbrust warned that the current U.S. stock index does not reflect the full reality of the market. The correlations between the S&P 500 and major macro assets have deviated significantly from long-term averages: the correlation with interest rates is at a ten-year low, with gold at a ten-year high, with VIX at a two-year high, and with oil at a ten-year low.

All these levels are extremely rare over a 20-year horizon. In other words, although U.S. stocks are still rising, their traditional linkages with rates, volatility, commodities, and safe-haven assets are breaking down. For investors relying on historical correlations for asset allocation, hedging, and risk budgeting, this signals declining model stability.

Meanwhile, Gamma has turned negative. In a negative Gamma environment, market sensitivity to price swings increases, and the “spot rising, volatility rising in tandem” situation suggests that the current rally is not a typical low-volatility bull market, but increasingly driven by position and options structure squeezes.

Data from Goldman Sachs’ HF Trend Monitor shows hedge fund allocations to momentum factors have risen to the 90th percentile, semiconductor positions hit a record 10%, and software positions fell to their lowest since 2019. High crowdedness in positions means that while the rally may continue in the short term driven by chasing funds, any reversal could lead to sharper corrections.

How far can U.S. stocks go? It depends on three constraints

The first constraint comes from oil prices. Diplomatic progress can quickly lower geopolitical risk premiums but cannot immediately repair the buffer capacity of shipping, insurance, refineries, and real supply chains. As long as the Strait of Hormuz situation and the prospects for U.S.-Iran ceasefire remain uncertain, oil prices may fluctuate between optimistic expectations and tail risks.

The second constraint stems from semiconductor positions. The current U.S. stock rally increasingly depends on AI and semiconductors, especially storage chips and momentum trading. If funds continue to chase this sector, indices may remain strong; but as positions become more crowded, sensitivity to earnings, guidance, or capital flow changes will increase, and any slight disappointment could be amplified rapidly.

The third constraint is the breakdown of correlations. The deviations of the S&P 500 from rates, gold, VIX, and oil’s long-term averages mean that the current rally does not equate to a comprehensive macro risk easing. More accurately, it results from a combination of declining geopolitical risk premiums, falling U.S. Treasury yields, AI semiconductor momentum, and position squeezes.

Therefore, the “solo celebration” of U.S. stocks may continue for a while, but market stability is waning. The real question is not whether indices can hit new highs, but which variables will force this trading logic to reprice—whether oil prices will rise again, interest rates will climb, semiconductor momentum will cool, and when the distorted correlations will restore.