Uh-oh.

Goldman has some bad news for a market that’s depended on a handful of stocks for an outsized percentage of YTD returns.

Here’s the “shocking” headline:

We and plenty of others have asked what would happen to this market if and when the stocks driving a quarter (or more, depending on what benchmark you’re looking at) of the gains should roll over.

That question is made even more important when you consider that hedge funds and large-cap mutual funds have overweighted a lot of these same companies in a farcical effort to best benchmarks by effectively levering up on the stocks driving benchmark returns (“stupid alpha”).

Here’s Goldman’s take, in brief:

• Unintended Consequences of Outperformance. While FANG has dominated investor focus, the nature of the acronym has expanded more broadly to encompass mega-cap tech. Indeed, the bigger story in our view is FAAMG – Facebook, Amazon, Apple, Microsoft and Alphabet – a group of five stocks which have been the key drivers of both the SPX & NDX returns year-to date. This outperformance, driven by secular growth and the death of the reflation narrative, has created positioning extremes, factor crowding and difficult-to-decipher risk narratives (e.g. FAAMG’s realized volatility is now below that of Staples and Utilities).

• Through the Factor Looking Glass: Mega Tech’s Impact FAAMG, as well as Tech more broadly, is increasingly correlated with both Growth and Momentum. While this phenomenon may persist given portfolio managers’ “FOMO,” passive carry and the lack of any pro-cyclical policy wins or movement in risk assets (e.g. 10-year) mean reversion risk is increasing.

• Also worth watching: the current P/E of our long/short Momentum factor is 1.8 std. deviations above its 3-year average – a level last seen in early 2016 prior to “Factormageddon.” We see factor valuation is a useful gauge of investor sentiment and crowdedness with downside risk increasing when factor valuations are stretched vs. history.

• Is FAAMG the New Staples? Remember “Min Vol” – its Back… FAAMG stocks are cyclical growth stocks that have increasingly been treated like stable Staples with a similarly negative correlation to interest rates and even lower realized volatility. These “min vol” characteristics could draw incremental flow into the stocks but can just as easily reverse.