Jan 15, 2024
Goldman Strategists Say Stock-Market Crowding Poses Setback Risk
, Bloomberg News
(Bloomberg) -- Bulls are crowding the stock market, increasing the risk of a pullback after the strong end-2023 rally, strategists at Goldman Sachs Group Inc. said.
Equity positioning and sentiment have both risen to relatively bullish levels, the bank’s proprietary indicators suggest — a level of optimism that often curbs further gains, strategists led by Cecilia Mariotti wrote on Monday. US equity flows have already slowed in the first few weeks of 2024, they noted.
“With bullish positioning increasing the risk of set-backs, we think supportive macro and market conditions will be needed to sustain the elevated levels,” Mariotti said.
US equities jumped in the last two months of 2023, as investors grew confident that the Federal Reserve will pivot as soon as March to cutting interest rates. The rally cooled in the first week of January, before picking up again last week after a surprise decline in producer prices reinforced the policy-easing bets.
The Goldman strategists described the current set-up of very bullish positioning with a low level of breadth — the number of stocks rising versus those dropping — as “very unusual.” Noting the tech sector’s overwhelming dominance of the rally, they added that “if breadth does widen, the asymmetry for positive equity returns could be more favorable, while narrowing breadth points toward flat near-term returns.”
Mariotti said, however, that while the current elevated positioning implies low or average S&P 500 returns over the one- to three-month horizon, it does not represent a bearish signal per se.
Even with last year’s 24% jump in the S&P 500, investors chose to pour large sums into money-market funds, meaning many missed out on the equity rally. That trend has continued in January, and could lead to further stock gains, according to the Goldman team.
“The large amount of capital currently deployed in money market funds could support both a further rotation into equities and a widening in breadth,” they added.
--With assistance from Michael Msika.
©2024 Bloomberg L.P.
