US Equities Surge While The US Dollar Lags; Goldman Sachs Explains The Divergence

An AI-fueled rally in US stocks is leading global risk asset gains, yet the US Dollar has failed to appreciate alongside equities. Goldman Sachs’ latest research lays out three core factors driving this cross-asset decoupling.

The bank states AI-powered outperformance of US equities against other developed markets has broken the long-standing positive correlation between the S&P 500 / MSCI ACWI ex-US ratio and the trade-weighted US Dollar Index.

Three Core Drivers Behind The Stock-Dollar Divergence

-US stocks only outperformed other developed market equities Asia’s tech-heavy markets like South Korea also posted sharp gains on AI capex optimism, at times outpacing US benchmarks, and these markets fall outside the MSCI developed ex-US index scope. Goldman’s regression analysis shows US equity inflows generate far stronger bullish pressure on USD vs emerging market currencies than USD vs developed currencies, restricting upward spillover effects for the US Dollar in this cycle.

-Temporary near-term earnings optimism limits sustained dollar demand Market 1-year US earnings growth estimates stand far above 2-year projections, pricing a slowdown in corporate profit expansion ahead. Short-lived upgrades to near-term profit forecasts trigger far less steady dollar buying than prolonged earnings growth cycles.

-Extreme market breadth compression weakens FX transmission The current rally is overwhelmingly concentrated in mega-cap names, with the top 10 S&P 500 constituents making up nearly 40% of the index’s market cap — among the narrowest breadth readings in decades. Goldman’s historical data confirms lopsided stock rallies correlate with a bigger gap between equity gains and muted dollar appreciation.

Despite this disconnect, Goldman emphasizes US equities have shifted from a headwind to a solid tailwind for the dollar, a sharp reversal from market dynamics at the start of the year.

Goldman Sounds Alarm On Overstretched AI Sector Valuations

Goldman strategist Rich Privorotsky issued a warning on the crowded AI trade. Investors have brushed off widespread bearish signals across the sector over recent weeks: hyperscale cloud operators ramp up AI spending continuously while their shares lag major benchmarks, creating a stark structural split from hardware leaders such as NVIDIA and TSMC.

The lofty valuations of the entire AI complex rest entirely on the single assumption of endless growth in AI infrastructure capex. Should any top tech giant announce plans to cut back AI capital spending, the core valuation framework for all AI-linked stocks will face a complete reset.