- Goldman Sachs’ Sentiment Indicator – which measures how far stock prices are outpacing fundamentals – climbed to two standard deviations above its average on Friday, signaling heightened risk of near-term market weakness.
- Rising COVID-19 hospitalizations and weak economic data add to the odds of “a modest positioning driven pullback in the next month,” strategists led by Arjun Menon said in a note.
- The bank still stuck with its forecast that the S&P 500 will rise 16% throughout 2021, hinging the forecast on expectations of widespread vaccine distribution.
- Such stretched positioning historically led to market weakness over the next one to four weeks, Goldman said. Still, stock returns typically turned positive after two months, the team added.
- Visit the Business Insider homepage for more stories.
Unusually optimistic investor sentiment endangers the stock market’s near-record levels heading into the new year, Goldman Sachs strategists said Monday.
Positioning in stocks is at “extremely stretched” levels as prices rally further beyond equities’ fundamentals, the team led by Arjun Menon said in a note to clients. The bank’s Sentiment Indicator – which tracks stock positioning among retail, institutional, and foreign investors – landed two standard deviations above average on Friday, representing a 98th percentile reading since 2009. The gauge last hit that level in September 2019, months before the coronavirus ended the US’s longest bull market in history.
Readings above one standard deviation “historically signaled stretched equity positioning,” the team said. Such positioning tends to present a headwind to short-term returns when economic growth is slowing or stable, they added.
“The recent surge in COVID hospitalizations and weaker-than-expected economic data therefore increase the risk of a modest positioning-driven pullback in the next month,” the Goldman strategists said.
Stocks are trading just off of record highs, most recently falling on concerns of a delayed stimulus package. Enthusiasm around President-elect Joe Biden’s victory and progress toward approving a coronavirus vaccine boosted outlooks on Wall Street through November and fueled a shift in investor capital from growth stocks to riskier value names.
The team still holds a largely bullish outlook toward 2021 market returns despite near-term risks. The bank doubled down on its call for the S&P 500 to hit 4,300 by the end of 2021, implying a 16.3% rally from current levels. Widespread vaccine distribution throughout next year will drive a V-shaped recovery, and any risks from stretched positioning will fade in a few months, the team said.
In prior instances when Goldman’s Sentiment Indicator landed two standard deviations above average, S&P 500 returns were weak in the next one to four weeks but almost always positive after two months, the bank added.
Even with equity allocations at their currently heightened levels, the strategists expect investors to continue pushing cash from money-market funds into the stock market. Cash yields are set to hold near zero for several years, and hopes for economic recovery will set stocks on an upward trajectory, the bank said.
Households and foreign investors are expected to be net buyers of US stocks throughout next year, with the former group poised to push $100 billion into the market. Mutual and pension funds will be net sellers, Goldman said.
Now read more markets coverage from Markets Insider and Business Insider: