Goldman Sachs: U.S. Institutional Liquidity Drops 34% Amid Economic Uncertainties, China Sentiment Sours

Goldman Sachs has recently highlighted two significant trends in the financial markets: the shrinking liquidity among institutional investors in the U.S. stock market and the evolving market sentiment towards the Chinese economy. The first trend underscores a decline in liquidity, indicating that institutional investors are adopting a more cautious stance and reducing their equity exposure. This shift is likely driven by economic uncertainties and geopolitical risks, fostering a more risk-averse investment environment.

The data shows that despite an overall increase in market trading volume, institutional liquidity has not benefited proportionally. Since 2021, trading volume has risen by 47%, but the best bid and offer (Top of Book) liquidity has decreased. Over the past four years, the trading size (Touch Size) of the S&P 500 index has declined by 34%. In contrast, the S&P 500 index, excluding the "Magnificent Seven" (the seven largest tech companies by market capitalization), has seen a 7% reduction in trading size over the same period. This disparity suggests that the liquidity decline is more pronounced in the broader market compared to the tech giants.

The widening bid-ask spread further illustrates this trend. Over the past four years, the bid-ask spread for the S&P 500 index, excluding the "Magnificent Seven," has increased by 98%. In comparison, including these tech giants, the spread has widened by only 67%. This indicates that the liquidity crunch is more severe in the broader market, where institutional investors are less active.

The second trend focuses on market sentiment towards the Chinese economy. The chart compares the sales exposure of China (GSXUCHSE) and the U.S. (GSXUAMER) from June 11, 2020, to June 11, 2025. The blue line represents the sales exposure of China relative to the U.S., while the orange line represents the performance of the Chinese ETF (FXI). The chart reveals a growing pessimism among investors regarding China's economic outlook. This shift in sentiment is influenced by regulatory policies, trade tensions, and the impact of the COVID-19 pandemic on the Chinese economy. Investors are becoming increasingly cautious about the risks associated with investing in China, leading to a more conservative approach towards Chinese equities.

These two trends are interconnected and reflect the broader economic and geopolitical landscape. Institutional investors are reassessing their strategies in response to these changes, leading to a more selective and cautious approach to equity investments. As economic uncertainties and geopolitical risks persist, these trends are likely to continue, shaping the investment landscape for the foreseeable future. The shrinking liquidity in the U.S. stock market and the evolving sentiment towards the Chinese economy highlight the need for investors to adapt to a more volatile and uncertain environment.