The Collapse of "Consensus Trading" and the Birth of a New Consensus! Goldman Sachs Explains: Why Institutions Are Currently Significantly Reducing AI Holdings

The previously extremely crowded "long AI, short everything else" trade in the market is undergoing a painful unwinding. Amid record sell-offs, hyperscale cloud providers are facing a major test of monetization.

On October 22, Rich Privorotsky, Head of European FICC & Equities Trading at Goldman Sachs, was interviewed at the Goldman Sachs trading floor in London for the podcast "The Markets." Privorotsky revealed a shocking figure: "Last week, on our Prime book, we saw the largest ever technology stock sell-off in history."

In the face of this wave of selling, the ongoing Q3 earnings season is especially critical. Market focus has shifted from simply "storytelling" to strict performance delivery. Privorotsky pointed out that market expectations for AI capital expenditures (Capex) next year are as high as $1.1 trillion, but this is no longer enough to satisfy investors.

"It's not enough to say you're spending a lot of money; you have to prove that your backlogs are turning into substantial revenue," Privorotsky emphasized. "They must demonstrate a return on these expenditures while ramping up Capex. This is not an easy situation." He said that the growth of cloud business, monetization capabilities, and how fast free cash flow reaches breakeven will have a major impact on the currently highly sensitive credit market.

Double Constraints of Infrastructure and Capital: A 40-50 GW Electricity Gap Next Year

Behind the cooling of AI mania lie the hard constraints of infrastructure and capital pools in the real world. The market is wrestling with three core issues right now, with the spillover effect of funding costs and power supply at the forefront.

Privorotsky pointed out that the highly leveraged AI trading sphere (such as emerging cloud service providers) is under severe financing pressure: "Will these companies run into challenges in securing financing to deliver on their AI spending?"

The more pressing physical bottleneck is in electricity delivery capacity.

He presented a key data set: "The electricity shortfall for next year is around 40 to 50 gigawatts. If you can't secure the actual energy to power data centers, can you really deploy the chips you've already pre-ordered?" These concerns have led investors into "de-risking mode," hedging growth expectations by shorting AI and AI Capex trades, while funds flow into the bond market for safety.

Macro Paradigm Shift: From "Savings Glut" to "Spending Glut"

From a macrocycle perspective, Privorotsky painted a picture of a profound paradigm shift.

He said that his entire career has been spent in an environment of "savings glut"—there was so much money in the system that we didn't know what to do with it. But now, things have undergone a "seismic shift."

"Over the past year, we've projected more than $1 trillion in AI Capex, while most governments around the world are running fiscal deficits. We are in an era of 'spending glut.'"

This shift has driven up the cost of capital, naturally squeezing out marginal and lower-quality borrowers.

He observed that this pressure is evident not only in the widening of CCC credit spreads, but is even spilling into sovereign debt markets (such as French bonds with high fiscal deficits). Combined with persistently high energy prices, the overall market's risk appetite is being significantly dampened.

Market Sentiment Polarization—"AI Makes/Breaks the Market"

Amid complex macro and micro dynamics, investor anxiety is manifesting in a peculiar "polarization."

Privorotsky shared his recent exchanges with investors: "I met some investors who said, 'I'm worried we won't be able to deliver compute power, which scares me.' Then I met another group who said, 'I'm worried we'll over-deliver compute power, which also scares me.' Somehow, two completely mutually exclusive outcomes make up the sum total of market concerns."

Because energy prices have a major impact on the economy (while the S&P 500 appears stable, the median stock has in fact fallen more than 10%), the Financial Conditions Index (FCI) has tightened sharply, forcing the Federal Reserve to act further.

Privorotsky once firmly believed that "as goes oil, so goes everything else," but he now admits, in the current market context, the logic has shifted to "as goes AI, so goes everything else."

Despite the short-term pressure, Privorotsky is not entirely pessimistic. He notes that spot market compute prices are hitting new highs daily, and demand remains "insatiable and endless." In terms of trading strategy, he said that while conviction is currently low, assets related to "electrification" that have been heavily downgraded, as well as commercial aerospace assets and some transportation sectors, now have a considerable margin of safety and are worthy of cautious optimism.

Below is the full translated podcast conversation:

Chris Hussey 00:00

This is "The Markets." I'm Chris Hussey, and today is a Thursday in October. Joining me from the Goldman Sachs trading floor in London is Rich Probarowski, head of European equities trading under Prevo's FIC and Equities division. Thank you so much for being here. Thank you for having me. Hussey, let's get straight to it because, you know, I read everything you write, and you made an excellent point—that painful trade from early summer, the one everyone had no choice but to chase, was long AI, short everything else. It turned into a very large trade. Now, as we enter the Q3 reporting season, this trade seems to be unraveling. What's really happening? And how do you think this will unfold? The equity market has seen extreme concentration, and I have to say, the last few weeks have been particularly painful for this kind of consensus trade.

Rich Privorotsky 00:48

Everyone’s positions are highly concentrated in AI, semiconductors, and hyperscale cloud providers. I’d say that right now, the market is addressing three different issues. First, we are clearly seeing a spillover effect in capital costs. This is apparent nearly everywhere—be it CCC spreads, European sovereign spreads, or the most leveraged, cutting-edge parts of the AI trade, especially Neo clouds. So, it’s become a supply problem. Will these companies be able to find financing to deliver all this AI Capex? The second point also relates to supply: do we really have the ability to electrify and deliver gigawatts of power? There are doubts in the market about this, with next year’s estimate between 20 to 40 or even 50 gigawatts. So, if you can’t get the power to truly energize a data center, will you really be able to digest all the chips you pre-ordered?

Rich Privorotsky 01:38

These are worries hanging over the market, and together, they’ve pushed everyone into a de-risking mentality; you see this through AI trades and AI Capex trades that are lowering growth expectations. Meanwhile, as growth forecasts reset, bonds continue to rally—which was not part of anyone’s narrative.

Rich Privorotsky 01:56

Okay, that's a lot of information. But let's focus on the near term, which is really now—the Q3 earnings season. We’re already in it; some big tech names have reported, but there’s much more to come. What are you most focused on this earnings season? Yes, I think we are about to enter the critical phase of hyperscale cloud earnings. What really matters is not just seeing Capex holding strong—market consensus is for $1.1 trillion next year—but most importantly, to see sustained growth and monetization of cloud businesses. It’s not enough to say you’re spending a lot; you have to show that backlog orders are meaningfully turning into income. I think that’s critical for the market. How fast they achieve free cash flow breakeven—relative to market expectations—could have a significant impact on what is already an extremely sensitive credit market. So for me, there’s really a lot to watch. I’d say there are factors from other sectors of the economy too. But I think market focus will truly land on the hyperscale cloud providers and the quality of delivery, not just spend. The hurdle for these firms is very high. They have to keep raising Capex while also showing you the ROI. It’s not an easy scenario, is it? No, it really isn’t. But, you see, the bigger picture here is: daily, compute prices in the spot market are hitting new highs. The demand for what they’re selling is insatiable. So, I’d say…

Chris Hussey 03:23

With a slightly more optimistic view, they should still have quite a compelling story. All right, Rich, it’s been a while since you were on the show. The last time was back in January. But over this year, you’ve stuck with the mantra—"as goes oil, so goes everything else." Is that still your mantra? Yes, I think we’ve run into an extremely challenging environment in energy. And, you know, I think…

Rich Privorotsky 03:46

The market, the equity market, has tried its best to ignore, or at least isolate, the surge in energy prices. But that’s not quite fair, because while the S&P has done a fantastic job of isolating this, the median stock is actually down much more than 10%. That’s impacted rates. It affects FCI. In fact, we’ve gone through a major tightening of FCI, which in a sense forced the Fed to do more. And we have repriced a whole rate hike cycle. So I think energy is a big part of the story. We still bear a large risk premium on account of energy. Clearly, how this all moves forward over the next several weeks will be key for all risk assets. And my optimistic take is we get some form of resolution in the coming weeks. But I have to admit, I thought this should have happened two months ago—I was a bit off there. I think we all were. Of course, when you refer to FCI, you mean the Financial Conditions Index, which is…

Chris Hussey 04:35

A gauge of the economy—whether all economic pulses are tightening or loosening. It’s not just about rates. Looking at FCI, sometimes it’s driven by oil, sometimes it’s about stocks. Good point about oil.

Chris Hussey 04:48

But related to that oil trade, you had a line at the start of the year: I want to be long nominal assets—in a world of strong GDP growth, still strong expansion, and high inflation, I want to be long that stuff, so a lot of commodities. What’s your view on nominal assets today? Are they still worth a place in the portfolio?

Rich Privorotsky 05:11

I think, to answer that, I have to address the trillion-dollar question: Where does AI Capex go from here, and how sustainable is it relative to market expectations?

Rich Privorotsky 05:19

Because in reality, as we reprice it, we’re repricing everything—commodities, nominal assets. My instinct is that we’ve kind of thrown the baby out with the bathwater, and obviously started to worry about every aspect of it. Specifically: This week I met some investors who said, "I’m worried we won’t be able to deliver enough compute power—that scares me." Then I met another group who said, "I’m worried we’ll over-deliver compute power—that scares me." Somehow, we get two mutually exclusive outcomes that together form the sum of market fears.

Rich Privorotsky 05:50

So big picture, I think nominal assets remain the place you want to be—unless we get, you know, a deflationary-type collapse, with Capex pullback, everyone forced to contract, and a real credit cycle. Three months ago I’d have said that risk was very low; now, it’s definitely much higher. But my instinct is, medium to long term, that’s still where you want to be. Though I think, right now, maybe it’s wiser to add more barbell strategies to the portfolio. So it sounds like, where it used to be "as goes oil, so goes everything else," now it’s—

Chris Hussey 06:22

–as goes AI, so goes everything else. Is that right? I think, at the risk of oversimplifying, that’s about right. Yes, Rich, thank you for oversimplifying. I’m "Mr. Oversimplify," so I’m glad you went there. Of course, part of this will be a big credit cycle, and three months ago you didn’t worry about it; now, your worry has increased. Talk to us about that. Are you seeing cracks in credit? Are you talking about the issues in European sovereigns or more about what we’re seeing on the corporate side?

Rich Privorotsky 06:51

My entire career, you could say, has been within a "savings glut." You know, there was so much money in the system that we didn’t know what to do with it. And in just this past year, we’re looking to spend over $1 trillion on AI Capex.

Rich Privorotsky 07:05

Most governments globally are running fiscal deficits. We’re now in a spending glut. It’s a massive structural shift in how things work, and what capital costs are going to be. So, I think this naturally pushes out those on the margin, lower-quality borrowers. You can already see it in CCC spreads—admittedly, given the events in that area, there’s some uniqueness, but they’re moving a lot and are spilling over into broader credit. And clearly, you have concerns about French sovereigns—these are sovereign countries carrying massive fiscal deficits in this environment, so they too are being crowded out. I think all of this is having an impact, and if we circle back to the oil trade—while energy prices stay high, risk appetite stays low. For these assets, I think it’s now a bit of a buyers’ market. Yes, "from savings glut to spending glut" is beautifully distilled. That’s so true. And just five years ago, it was still a savings glut. The speed of this shift is incredible.

Chris Hussey 08:04

Right. A lot’s going on, as you’ve just outlined. Let’s wrap up. How should we trade this now?

Rich Privorotsky 08:10

It’s a messy situation, and I’d say confidence is not particularly high, but I do think there are some segments in the electrification space that look interesting. They’ve been seriously repriced, and I still think A27’s visibility is solid, providing a substantial margin of safety. A lot of aerospace assets have corrected, especially on the commercial aviation side—those are very appealing for us as well. Even in parts of transports, frankly, if the energy issues get resolved somehow—given net positioning is super low and the heavy selling we’ve seen in recent weeks—there’s a lot of convexity in this trade. For example, last week, tech stock selling in our prime brokerage book was the largest ever. So, I think there’s ample reason for concern; I don’t want to downplay that risk, but I still lean cautiously optimistic at this moment. Okay, Rich, let’s fast forward to next week. What are the key things you’re watching that could move the markets? I think the focus is on those numbers—the hyperscale cloud providers’ figures we’ve discussed. Let’s see the monetization, let’s see the Capex figures. That’ll be key for the tape. And, as you know, developments there will shape views on credit, on potential demand, and other data points from labs and suppliers. Rich, you always bring a lot of insights. Thank you so much for coming in today. Thank you. That’s it then.

Chris Hussey 09:30

We’ll leave it there. That concludes this episode of "The Markets". I’m Chris Hussey. Thanks for listening.