Goldman's Pasquariello sees October choppiness giving way to year-end rally

A complicated new phase in the AI (AIQ) (AIEQ) sequence has triggered a debate around capital costs and forced a round of risk reduction across global equity and credit markets, according to Goldman Sachs strategist Tony Pasquariello..

"We've entered a new phase in the AI sequence, one that is unequivocally more complicated," Pasquariello wrote in a recent note. Markets have "suddenly engaged in an intense debate around both the availability AND the cost of capital."

The shift in narrative has challenged consensus positions and punished crowded trades. Goldman's franchise recorded its single largest week of net tech (XLK) selling in at least a decade, with semiconductor (SMH) (SOXX) stocks bearing the brunt of the liquidation. Exposure in global AI stocks has dropped to the 35th percentile of the past year—the heaviest supply since ChatGPT's (OPENAI) debut.

Beyond technology, a widening gap between high-quality and low-quality assets is evident in both credit and equities, with high-yield bonds (HYG) (SCYB) continuing to underperform investment-grade paper (LQD) (USIG).

Despite the turbulence, Pasquariello said he remains constructive on seasonality. "All else equal, I'm still inclined to think the choppiness of September and October will give way to strength in November and December," he wrote, citing corporate share buybacks as the dominant technical force once Q3 earnings establish a fundamental floor.

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