MW Speculative trading is booming again. That could turn into a headwind for the S&P 500, says Goldman Sachs
By Jamie Chisholm
Investors have been piling into highly risky shares
The S&P 500 on Thursday registered it's 15th record high of the year. The tech-heavy Nasdaq hit a new peak, too. Great news for investors.
But the latest advance for equities has come with another meme-stock frenzy - causing many observers to worry it signals a blowout top is near.
As Bronte Capital writes in it's latest quarterly update: "Garbage stocks have risen aggressively. This is an environment like early 2021, when the consensus rapidly became that you should buy frauds because they will squeeze higher. People seriously talked about fraud as an asset class."
Is the speculative froth really that extreme? Goldman Sachs says not yet, but it's getting there and this has implications for future stock market returns.
In a note published late Thursday, a team of Goldman strategists led by Ben Snider say the bank's Speculative Trading Indicator $(STI)$ has risen sharply in the last few months, reflecting the elevated recent share of trading volumes in unprofitable stocks, penny stocks and stocks with elevated enterprise value to sales multiples.
However, as the STI chart shows, its level remains well below previous peaks of trader excess in January 2000 and February 2021.
Still, the rise in the STI is mirroring other current indicators of heightened risk appetite, says Goldman. These include a surge in optimistic option bets. Call options, which provide the buyer with the right to purchase the underlying asset at a particular price within a certain time, have recently accounted for 61% of all option volumes, Goldman notes. That's the highest proportion of calls since 2021.
Goldman also notes that the first trading-day returns for initial public offerings have "ballooned," and the $9 billion of special-purpose acquisition company issuance in the second quarter of 2025 represented the most active quarter for the speculative vehicles since Q1 2022.
Meanwhile, the burst of risky betting has accompanied one of the sharpest short squeezes on record, "another dynamic of both 2000 and 2021," says Goldman. A short squeeze occurs when traders who borrowed to sell a stock have to buy it back when the share price moves sharply higher.
Since early April, when the market plunged following Donald Trump's tariff announcement, Goldman's basket of stocks with a short interest as a proportion of float has bounced more than 60%. That's a three-month return exceeded only by the rallies in 1999-2000 and 2020-2021, says the bank.
Riding short squeezes - of the kind seen this week in Kohl's $(KSS)$ and Krispy Kreme (DNUT) - is a favorite play of retail investors. And indeed, Goldman notes the tight correlation between its share basket of small investor favorites and the STI.
Amid all this intense risk appetite, Goldman observes that broader market technicals appear supportive. "Despite the S&P 500 SPX sitting at record highs, average equity investor length remains neutral, short interest for the median S&P 500 stock remains close to the highest level since 2019, and market breadth remains extremely narrow."
However, they add that though the recent rise in speculative activity signals the chance of further gains, it also increases the risk of an eventual downturn.
"During the last 35 years, other sharp increases in speculative trading activity have signaled above-average subsequent 3-, 6-, and 12-month S&P 500 returns, but returns typically faltered on a 24-month horizon," says Goldman.
Markets
U.S. stock-index futures (ES00) (YM00) (NQ00) are mildly mixed as benchmark Treasury yields BX:TMUBMUSD10Y rise. The dollar index DXY is higher, while oil prices (CL.1) are up and gold (GC00) is trading around $3,350 an ounce.
Key asset performance Last 5d 1m YTD 1y S&P 500 6363.35 1.05% 3.62% 8.19% 17.86% Nasdaq Composite 21,057.96 0.83% 4.41% 9.05% 22.56% 10-year Treasury 4.423 0.00 13.80 -15.30 22.30 Gold 3350.8 -0.14% 1.97% 26.96% 40.45% Oil 66.18 0.23% 1.71% -7.92% -13.42% Data: MarketWatch. Treasury yields change expressed in basis points
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July 25, 2025 06:37 ET (10:37 GMT)
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