“We are witnessing a wave of AI creative destruction sweeping across industries worldwide!” Goldman Sachs partner: Essentially, this is a “moat check.”

Goldman Sachs Partner Rich Privorotsky warns that an AI-driven “creative destruction” is unfolding in real time across industries worldwide, essentially serving as a comprehensive test of corporate moats.

From last week’s shock to the software sector to early this week’s declines in insurance and wealth management stocks, followed by real estate services and logistics sectors in the latter half of the week. AI was initially seen as a positive factor for the stock market, but now it is aggressively testing which companies truly possess defensible competitive advantages.

The market is spreading a “sell first, ask questions later” sentiment, with selling accelerating, but aside from AI concerns, there are no clear catalysts. Privorotsky believes this is a moat check:

Can a company’s business withstand technological shocks? If an army of robots arrives, can it overthrow existing companies? Do companies need to compete by investing or acquiring, or else face being replaced?

Privorotsky further emphasizes the need to watch out for CTA (Commodity Trading Advisor) trigger signals in major U.S. stock indices. Goldman Sachs currently estimates that CTAs will sell $1.5 to $2 billion worth of U.S. stocks over the next week.

Software Sector Valuations Under Pressure

Rich Privorotsky believes AI has not allowed everyone to “sit back and relax”; instead, it is forcing those who want to “sit back and earn interest” in the economy to face reality.

In many fields once thought to have strong moats, technological progress is rapidly eroding those fortresses built on experience and knowledge work, with new entrants posing quick challenges to existing companies.

Once AI concerns disturb market sentiment, the terminal value of software and tech sectors is questioned, which is the core issue facing the market today.

Privorotsky points out that, based on his trading experience, valuation multiples are the most difficult metrics to anchor; once they are questioned, it’s hard to stop the decline.

Currently, the valuation of listed companies has fallen from over 30 times forward P/E (based on a blended forecast for the next 24 months) to just over 20 times, but private equity portfolios often still maintain much higher valuations.

As a result, this turbulence has spread from the public markets to private equity, further impacting private credit, especially the leveraged loan market.

Market Signals of Growth Shock

Last week, U.S. Treasury yields declined, and cyclicals were sold off relative to more defensive stocks.

Goldman Sachs notes that the current market feels like a short-term growth shock. The yield curve is flattening, and bonds continue to rise.

According to Wall Street Journal, U.S. January CPI year-over-year was 2.4%, below expectations, and core CPI fell to its lowest level in four years. Market concerns about inflation have eased, aligning with the narrative that AI will disrupt multiple industries faster than expected.

Goldman Sachs believes that in some sectors, a thorough deflation may eventually occur because “rentiers” are losing pricing power.

Investors Should Focus on Truly Moat-Rich Companies

In this environment, Rich Privorotsky recommends paying attention to companies with genuine moats and tangible assets.

The aerospace sector seems to be at an opportune moment, with exposure to Airbus-type companies worth watching. Industrial stocks should perform well, but investors should select those benefiting from investment cycles rather than just short-term cyclical stocks.

Physical assets are a long position, although the recent surge in commodities isn’t worth chasing at high levels. He favors European REITs and long positions in German residential real estate but avoids office REITs.

Bank stocks appear fragile, facing four risks: in Europe, they are crowded long positions; they have hardly priced in AI disruption or net interest margin compression; under deflationary mechanisms, a weaker dollar is unfavorable for the yield curve; in the U.S., market forecasts show a more than 30% chance of a Democratic sweep, significantly increasing regulatory risks.

CTA Selling Trigger Approaching

Privorotsky emphasizes the need to watch for CTA trigger points in U.S. indices.

In North America, the most severe selling is expected not in the S&P 500 but in the Nasdaq 100. The S&P 500 has already broken below the 50-day moving average (6895 points) and the CTA short-term threshold (6911 points).

The good news is that the scale of the sell-off remains moderate. Goldman Sachs estimates that CTAs will sell $1.5 to $2 billion of U.S. stocks over the next week. Additionally, the S&P 500 remains about 110 points above the medium-term threshold of 6723 points; a break below that level would accelerate the sell-off.

(Forecast of fund flows under different scenarios for the S&P 500 over the next month)

Privorotsky states that as AI lowers barriers to entry daily, the market is now differentiating winners and losers. He cannot predict what the shipping industry will look like tomorrow, but it’s clear that terminal valuation multiples are being questioned, which is a structural issue.

The current environment favors companies with real moats and tangible value. Emerging markets remain relatively clearer safe havens, and global trading will continue to drive relatively strong performance.

Risk Warning and Disclaimer

Market risks are present; investment should be cautious. This article does not constitute personal investment advice and does not consider individual users’ specific investment goals, financial situations, or needs. Users should consider whether any opinions, views, or conclusions herein are suitable for their particular circumstances. Invest accordingly at your own risk.