Goldman Sachs Warns of Speculative Trading Surge as S&P 500 Hits Record Highs

Goldman Sachs warns investors to be cautious as the S&P 500 hits record highs. The firm's Speculative Trading Indicator has climbed to its highest level since the COVID-19-era market frenzy, driven by risky stocks like unprofitable companies and those with high valuations. Analysts say this type of activity can lead to strong gains in the short term but increases the risk of a sharp drop later on.

Goldman Sachs has sounded a cautionary note to investors, as its Speculative Trading Indicator has surged to its highest level since the COVID-19 market frenzy [1]. The indicator, which tracks activity in risky stocks like unprofitable companies, penny stocks, and those with high valuations, has climbed sharply over the last few months. According to Goldman Sachs, this surge is being driven by an elevated share of trading volumes in these risky assets, including several "Mag 7" stocks, digital assets, and quantum computing companies [1].

The firm noted that the most actively traded names include several high-risk stocks, which have seen significant price appreciation. Additionally, the rise in speculative trading mirrors other signs of increased risk appetite within the equity market, such as a jump in call option volumes and a resurgence in IPO and SPAC issuance [1]. For instance, first-day IPO returns have surged, and $9 billion of SPAC issuance in the second quarter marked the busiest three-month period since early 2022 [1].

Goldman Sachs also highlighted that a proprietary basket of stocks popular with retail traders (GSXURFAV) has gained 50% since April, underscoring the market’s speculative tone [1]. While this activity could signal near-term upside risk for the broad equity market, the firm warned that it increases the risk of an eventual downturn [1]. Historically, spikes in speculative trading have preceded strong 3-, 6-, and 12-month S&P 500 returns, but also below-average returns on a two-year horizon [1].

In a separate development, some high-flying artificial intelligence (AI) stocks have seen their stock prices soar over the last few years. However, analysts have expressed concerns about the valuation of these stocks, which have outpaced their financial growth. For example, Palantir Technologies (PLTR) and CrowdStrike (CRWD) have seen their stock prices climb significantly, but some analysts believe the valuations are unsustainable [2].

Investors should remain vigilant and consider the risks associated with speculative trading and high valuations. While these activities can lead to short-term gains, they also increase the potential for sharp drops in the market. As always, it is essential to conduct thorough research and consider seeking professional advice before making investment decisions.

References:
[1] https://finance.yahoo.com/news/goldman-sachs-speculative-trading-indicator-144928285.html
[2] https://www.nasdaq.com/articles/2-high-flying-artificial-intelligence-ai-stocks-sell-they-plummet-74-and-30-according