[GSX] Global Reflections Aug 1

A few records were broken this week. July delivered the worst 1m performance in high beta momo since GFC. And thematic/factor vol is at post-Covid highs. What’s next? Our conversations with investors have swiftly swung from ‘when to buy the dip’ to ‘is this rebound sustainable?’ Five key points: • Momo Capitulation. This week’s sell-off has erased most of the YTD gains in our US (GSPRHIMO) and European (GSPEMOMO) high beta momo factors, only weeks after delivering record 1H rallies. The pace and scale of the move have meant factor vol is realizing at its highest post-Covid level, while index vol remains muted. GS PB and flow data show the largest 3-day de-gross since Nov 2022 and a sharp reduction in net exposure to YTD lows across momentum, mega-cap tech (GSX1MEGA) and broad AI (GSTMTAIP). The technical reset likely indicates we’re most of the way through this unwind, but elevated vol suggests the rebound will be choppy. We prefer limited loss expressions to gain exposure for now. o US High Momo GSXUHMOM Sep 120% 150% call spread costs 4.50% o EU High Momo GSXEHMOM Sep 105% call costs 2.25% (all pricing is indicative). • Which Dips Are Worth Buying? While diverging AI capex and monetization narratives across Hyperscalers (GSXUHYPR) imply some idio risk in the trade near- term, their 2Q prints did reassure on the fundamental AI demand picture, which coincided with a better technical backdrop to buy AI. From here, we’re most convicted in the AI hardware rebound, given intact solid fundamentals. Our favorite expressions include US Datacentres (GSTMTDAT), EU Semis and Broad AI (GSSBSEMI, GSXEAICP) and Asia AI Bottlenecks (GSXABOTL). Over time, as Hyperscalers continue to deliver accelerating revenue and operating leverage on elevated AI spend, the market will reward this capex, especially in the context of the group’s ~12pp YTD underperformance versus SPX. Post Fed, an increasingly unanchored long-end should also consolidate Hyperscaler (GSXUHYPR) performance relative to the more rate-sensitive Non-Profitable Tech (GSXUNPTC) complex. • A word on SPXXAI. Over the last few weeks, SPXXAI has done its job in being the most robust solution to hedge the AI meltdown. After hitting an all-time-high on Tuesday, the index is giving back some performance amid demand to re-gross in AI. But SPXXAI is also the ultimate AI winner. Beyond near-term technicals, the rapid decline in silicon and inference costs will support a broadening of AI beneficiaries from infrastructure plays to the non-AI adopters of AI who can deliver higher productivity and earnings leverage. (See chart #6 below - H/T Rich Privorotsky).

• …And Rallies Worth Fading? Structural shorts that squeezed higher in July’s momo meltdown now offer a compelling (and rare) re-entry point to short. Over the last 1m, US AI at Risk (GSTMTAIR) and Asia AI at Risk (GSXARISK) rallied ~15% though both trades have already started to give back some of their July gains. Outside of the AI complex, structurally challenged European multinationals vulnerable to China competition (GSXECHNX) have rallied +7% in July. Price action has dislocated from EPS, leaving valuation at the 85%ile of its 5Y history. Into year-end, we see risks to European gas prices skewed higher, implying incremental margin pressure for gas consuming stocks (GSXETTFX) and potential for the ~5% rebound from June lows to unwind. • Ones to Watch. As we approach the end of 2Q reporting, the next few weeks are fairly catalyst light. But come September, political noise will pick up ahead of US midterms and with eight EU states going to the polls in 2027. For the US, the one policy area we’re focused on is electricity pricing, where we expect US IPPs (GSXUIPPs) and Domestic Solar (GSXUSOLR) to benefit from a sharp increase in RES capacity additions to 2030E. In Europe, we’re watching French election headlines and highlight French Domestics (GSXEFRDO) as the most sensitive pocket to political risk and potential credit spread widening. Limited loss expressions on all trades available. Reach out for pricing. US High Beta Momo (GSPRHIMO) versus SPX realized vol is at one of its largest spreads in a decade…