Goldman Sachs: Excessive crowding of long positions increases the risk of a pullback in the US stock market.
Goldman Sachs strategists have stated that the influx of bulls into the stock market increases the risk of a pullback after a strong rebound by the end of 2023. The strategists point out that both stock positions and sentiment have risen to relatively bullish levels, which often dampens further upside in the market. Additionally, the strategists believe that technology stocks have taken the lead in this rebound, and a narrowing breadth suggests that recent returns may plateau. Goldman Sachs strategists expect a significant amount of funds deployed in money market funds to shift towards the stock market, further driving the market higher.
Zhitong App learned that Goldman Sachs strategists have stated that the influx of bulls into the stock market increases the risk of a pullback after a strong rebound at the end of 2023. Led by Cecilia Mariotti, Goldman Sachs strategists stated on Monday that the bank's proprietary indicators show that stock positions and sentiment have risen to relatively bullish levels, which often dampens further market gains. The strategists pointed out that US stock flows have already slowed down in the first few weeks of 2024.
Cecilia Mariotti said, "Due to the increased risk of a pullback from the increase in bullish positions, we believe that the stock market needs supportive macro and market conditions to maintain its high level."
US stocks surged in the last two months of 2023, as investors quickly increased their bets on the Federal Reserve's earliest interest rate cut in March. This momentum cooled off in the first week of January, but after the unexpectedly low US December PPI data was released last Friday, reinforcing investors' bets on the Fed's shift to loose policies, this momentum reappeared.
Goldman Sachs strategists stated that the current pattern of highly bullish positions but low breadth (the ratio of rising stocks to falling stocks) is "very unusual". The strategists pointed out that technology stocks have overwhelmingly dominated this rebound, "if the breadth does expand, the asymmetry of stocks achieving positive returns may be more favorable, while a narrowing breadth means that recent returns will remain flat."
However, the strategists stated that although the current increase in positions suggests lower or average returns for the S&P 500 index in the next one to three months, it does not necessarily indicate a bearish signal.
In addition, despite the S&P 500 index rising by 24% last year, investors still chose to invest a large amount of funds in money market funds, which means that many people missed out on the stock market rebound. Goldman Sachs strategists stated that the significant amount of funds deployed in money market funds may shift to the stock market, which could mean an expansion of breadth and further push the stock market higher.