Goldman Sachs Warns of Uncertainty as U.S. Stocks Rally 18%

Goldman Sachs has recently cautioned investors about the recent surge in U.S. equities, noting that bear market rallies are typical and that market movements are predominantly driven by uncertainty. Over the past two weeks, U.S. stocks have seen a substantial rebound, recovering all losses since April 2. Peter Oppenheimer, an analyst at Goldman Sachs, recently pointed out in a research report that the current market environment is fraught with uncertainty, with investors neither fully bullish nor bearish.

Oppenheimer highlighted that the market's primary driving force remains uncertainty, making investment decisions challenging. Investors are faced with the dilemma of either chasing a weakening rally and risking a late exit or missing out on another round of forced buying. This environment has compelled many investors to reluctantly buy back into the market, despite their reservations about future macroeconomic growth prospects.

Historical data suggests that this rally may have reached its peak. Since 1980, global stock markets have experienced several bear market rallies, averaging a 14% gain over 44 days. Although this year's market decline has not yet been officially classified as a bear market, prices have risen 18% from their April 7 intraday low. This indicates that the current rally may have exhausted its upward momentum.

John Marshall, a managing director at Goldman Sachs, noted that the financing rate spread, which measures the demand for long positions through stock derivatives, has decoupled from the recent stock market rally. This suggests that macro investors have reduced their stock exposure during the recent strength. Marshall anticipates heightened volatility this week, as the Federal Reserve meeting will provide crucial insights into the economic outlook for June and July.

Systematic macro investors have been steadily increasing their buying, supporting the rally. Goldman Sachs traders reported that systematic macro investors bought $510 billion last week and are expected to purchase $570 billion this week. However, the overall buying volume is not substantial enough to significantly impact market liquidity, especially given the high volatility environment.

Other buying flows during the rally appear more strained. Morgan Stanley's tactical positioning monitor is currently neutral, with a slight increase in positions over the past week. Hedge funds have increased their leverage compared to the previous month, currently at the 96th percentile of the long-term range. Meanwhile, retail investors continue to add risk exposure, with the strongest buying month since 2017, as they purchase both individual stocks and ETFs.

In summary, while the recent rally has provided some relief to investors, the underlying uncertainty and limited upside potential suggest that caution is warranted. Investors should remain vigilant and consider the long-term implications of their investment decisions, as the market continues to be driven by uncertainty and potential risks ahead.