Individual investors have been buying stocks -- and aren't showing any sign of letting up. That is a good sign for the market, according to Goldman Sachs.
The S&P 500, which has been on a rocky course, recently traded at around 6040, up 1%, on Monday. While up about 2.7% this year, it is about 1.7% below its all time high of 6144 hit in February.
Recent data from Goldman Sachs suggest individual investors largely treated the market's wild gyrations following President Donald Trump's April 2 "Liberation Day" trade announcement as a buying opportunity.
U.S. households have been maintaining higher-than-average levels of margin debt, wrote strategists led by David J. Kostin in a note Friday. In addition, while mutual fund and ETF flows have been relatively weak, Goldman Sachs said households have made $20 billion in net purchases of individual stocks over the last three months, a period that stretches back to mid-March.
"These retail trading data jibe with broker commentary noting that their client bases were aggressively buying during the April drawdown and with sharp rallies in some popular retail stocks in recent weeks," wrote Kostin's team.
Buying by retail investors is a key driver of stock market returns since about 38% of U.S. stocks are owned directly by U.S. individual investors. That makes them the single largest ownership cohort, according to Goldman Sachs, and puts them well ahead of mutual funds and ETFs, which are owned by about 26%.
Nearly 60% of American households own stocks, according to a 2022 survey of U.S. finances by the Fed. About 21% of households owned individual stocks, the survey found. Both figures have increased in recent years, thanks in part to a surge of interest in stock trading since Covid.
While stock ownership is widespread, it is still in many ways the province of the rich, whose shareholdings vastly outweigh those of the middle class. Of all the stocks owned by U.S. households, about 87% are owned by the wealthiest 10% and 43% by the wealthiest 1%, according to Goldman Sachs.
U.S. retail investors should continue to buoy the S&P 500 as long as hiring and household balance sheets remain healthy and interest rates remain low, forecast Goldman Sachs.
"We believe that persistent household equity demand and high allocations to equities will continue to support elevated equity valuations," wrote Kostin's team.
That take may be surprising -- after all U.S. consumer sentiment is near record lows and debt at record highs. But consumers may be a lot more bullish than they appear at first glance. Economists have recently begun to doubt dismal readings of the University of Michigan's monthly Index of Consumer Sentiment, long a bellwether, because of new data collection methods and worries about political polarization.
And, while debt levels have increased steadily in the past few years, those have been offset by higher incomes. U.S. household's debt service payment amounted to only about 11% of income in the fourth quarter, according to St. Louis Fed. Apart from during Covid and its flood of stimulus checks, that is lower than at any time since the late 1990s.
Meanwhile, hiring remained steady in May, with the U.S. adding 139,000 jobs. As far as interest rates go, Fed policymakers begin a two-day meeting on Tuesday. Wall Street widely expects the Fed to keep benchmark interest rates steady, with most traders betting they will gradually lower them by 0.25 to 0.75 percentage points by year end.