Amateur investors are changing how the stock market works. That’s creating opportunities for those who know where to look.

One of Wall Street’s most foundational modern beliefs is that the stock market is a cold, calculating machine that assigns values to individual securities with a high degree of precision.

The efficient-markets hypothesis, developed decades ago by economists at the University of Chicago, stipulates that all available information is already factored into the market price.

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But a top quant at Goldman Sachs says that in the years since Robinhood HOOD ushered in the dawn of commission-free trading, the millions of amateur investors now placing orders on their phones appear to be changing the U.S. equity market in new and notable ways — with disciplined fundamental analysis increasingly being trumped by fleeting enthusiasm.

“The markets are driven by human investors and human biases, and that has always been the case and that continues to be the case today,” said Osman Ali, a partner and co-head of quantitative investment strategies at Goldman Sachs Asset Management, in an interview with MarketWatch. “But I see a market that is, in some cases, arguably getting less efficient.”

Biases amplified

Ali and his team have been analyzing the behavior of individual investors by collecting and processing reams of trading data, he told MarketWatch. He laid out his findings in a report shared with Goldman Sachs Asset Management clients earlier this year.

First, according to Goldman’s numbers, the share of total trading activity attributable to retail investors has more than doubled since 2010, as the below chart shows — including a big spike during the pandemic. The elimination of the pattern day-trading rule, which was removed by regulators earlier this month, means activity should continue to increase in 2026, Ali said.

As far as quality goes, individual investors have a preference: They gravitate toward stocks with small market capitalizations, volatile returns and high valuations relative to fundamentals like earnings and sales growth. Individual investors also tend to be more active in shares of stocks with high short interest. Activity in heavily shorted names was higher in 2025 than in 2021, when the original meme-stock mania delivered a major boost to shares of GameStop GME and AMC Entertainment AMC.

Signs that retail interest could be distorting prices aren’t hard to find: Shares of retail favorites tend to see greater underperformance following a disappointing earnings report, Ali noted.

Frequent deviations from intrinsic value represent an opportunity for investors who can recognize patterns and capitalize, Ali said. Investors could potentially make money on both sides of the trade — buying into the hype on the way up, and betting against these names after the momentum has peaked.

Ali said the arrival of AI tools like large language models could theoretically make some markets more efficient by helping analysts more easily uncover and recognize untapped value. But there is a risk that, in markets with more retail activity, these same tools could help to drive even more investors into a handful of hot names, crowding stocks and distorting prices.

“AI has the potential to amplify human biases and their impact on markets,” Ali said. “Four people asking the same questions from AI are going to get four very similar answers.”

Over the past two years, lower-quality names have dramatically outperformed higher-quality names. The difference in performance between the iShares Edge MSCI USA Quality Factor ETF QUAL and the Invesco S&P 500 High Beta ETF SPHB helps capture this divergence.

The idea that technology is making markets less, not more, efficient has been part of the conversation for a few years. In November 2024, AQR founder Cliff Asness published a paper in the Journal of Portfolio Management where he blamed the growing influence of social media for helping to drive prices further away from what fundamentals, like earnings and sales growth, might justify.

See: The market is getting less efficient. Ape this strategy from meme-stock investors, veteran fund manager says

This contradicts the seemingly common-sense notion that making information more widely accessible would lead to more efficient markets. Indeed, according to Asness, the opposite appears to be closer to the truth.

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