Unfazed by the continuous decline of the S&P 500 index, Goldman Sachs claims that investors still have room to further increase their stock holdings.

The S&P 500 index has fallen for the third consecutive week, expected to record the largest monthly decline in 2023. The main reasons include rising US bond yields and potential ongoing interest rate hikes, which have made US stock investors begin to worry that the recent bull market may be coming to an end.

However, Goldman Sachs' strategy team believes that as long as the economy continues to grow steadily, investors still have room to increase their allocation to stocks.

Goldman Sachs' stock sentiment indicator reflects nine different positioning indicators, including net exposure of hedge funds, net demand from foreign investors, and fund flows of active and passive equity funds. In the week ending August 18, the indicator rose from -1.8 in December to 1.5 last month, but has now dropped to 0.8.

David Kostin, Chief US Equity Strategist at Goldman Sachs, stated in a report last Friday that stock investors' "rapid reassumption of risk" is driven by positive economic developments and the "widespread adoption" of artificial intelligence.

However, Kostin and his team expect the decline in stock allocation measured by the sentiment indicator to be temporary. They stated that if the market environment continues to improve, mutual funds and hedge funds will further increase their exposure.

Furthermore, Kostin's team pointed out that although hedge funds have increased their net exposure this year, net leverage is still below the average level of the past five years. This means that if the "soft landing" of the economy continues, funds still have room to increase their long-term exposure to stocks.

In addition, the team noted that retail investors' participation in the stock market has increased this year, which may lead to more stock purchases. Finra data shows that margin balances in the first seven months of 2023 have increased and have now reached the highest level since February 2022.

Meanwhile, as the lock-up period for nearly 85% of S&P 500 index companies after the second quarter earnings season ends, buyback demand will boost stocks in the coming weeks.

A few months ago, Goldman Sachs strategists raised their S&P 500 index target from 4000 to 4500, implying a 2.3% upside compared to Monday's closing level. The bank was one of the first Wall Street giants to raise its year-end target for US stocks.

As of Monday's close, the Dow Jones Industrial Average fell 0.11% to 34,463.69 points; the Nasdaq rose 1.56% to 13,497.59 points; and the S&P 500 index rose 0.69% to 4,399.77 points.