Amid heightened geopolitical risks and increased market volatility, Goldman Sachs' trading division has issued a warning advising investors against hastily turning bearish on US equities. The current market structure, they note, may instead make it more susceptible to a short squeeze if positive news emerges. Market performance shows the S&P 500 is heading for its worst monthly performance since 2022, while the Nasdaq has entered a technical correction. Although Goldman Sachs does not see a clear path for near-term gains, its trading team believes the current selling pressure is nearing its end, making it risky to further increase short positions under these conditions.
In a report, Goldman's strategy team highlighted that while the market requires hedging and flexible strategies, "given the current positioning structure's sensitivity to a short squeeze risk, shifting to a short stance is not recommended." Data indicates that trend-following funds (CTAs) have sold approximately $55 billion in US stocks this month, with a net short position now reaching $18.4 billion. Goldman Sachs believes that, barring new macroeconomic shocks, this round of systematic selling is "approaching its conclusion," and the market's risk-reward structure is gradually tilting upward.
Concurrently, risk parity and volatility control strategies continue to reduce equity exposure. Risk parity strategies have cut over $20 billion globally, accounting for about one-sixth of their total long positions. However, from a liquidity perspective, there has been no significant market retreat. Inflows into equity funds remain steady, household investors have barely reduced their stock holdings significantly, and overall positioning among fundamental investors remains near historical highs. This suggests that if positive developments, such as a de-escalation in geopolitical tensions, occur, the market could experience a magnified rebound.
On the geopolitical front, recent US and Israeli strikes on multiple Iranian nuclear and steel targets, combined with Iran's continued retaliatory actions in the Persian Gulf and its rejection of a ceasefire proposal from US President Trump, have further increased market uncertainty. Additionally, Goldman Sachs anticipates that pension fund flows will bring about $14 billion in net inflows to US stocks by month-end, providing some market support. Retail investors have only slightly reduced their equity allocation by about 1% from recent highs, indicating sustained long-term confidence in US equities.
Goldman Sachs pointed out that although short-term uncertainties persist, as month-end liquidity factors gradually play out, the market may find a clearer trajectory entering April.