Market Trends

Goldman Sachs Highlights Potential Surge in US Stocks and Bonds Amid Inflation Data Anticipation

(Bloomberg) – The anticipation around key inflation data has sparked a notable sentiment shift across US financial markets, with traders significantly accumulating long positions, signaling an increase in the upside risk for both stocks and bonds this week. Leading global investment firm Goldman Sachs Group Inc. has been closely monitoring this activity and weighing in on the possible implications for investors.

FOMO Influencing Market Positions

Goldman Sachs’ tactical specialist Scott Rubner expressed that the mounting Fear of Missing Out (FOMO) could translate into considerable market movements. "I am starting to witness a real sense of FOMO kicking in, buoyed by what we observed in the previous week," Rubner relayed in a client advisory issued on Monday.

S&P 500 Index's Performance amidst Positive Corporate Earnings

Amid three consecutive weeks of rallies, the S&P 500 Index lingered near a striking 5,220 on Monday. Contributing factors to these gains included the speculation that the Federal Reserve might lean towards slashing interest rates before year-end, coupled with resilient corporate earnings figures. To date, a remarkable 79% of companies in the S&P 500 have surpassed expectations for first-quarter earnings-per-share, a consequence reflected in data sourced by Bloomberg.

Resurgence of Meme Stocks

The revival of meme stocks has also become a topic of discussion, with unprofitable and heavily shorted stocks witnessing a rally. A notable instance was GameStop Corp's impressive climb, following remarks from Keith Gil. Known widely as "Roaring Kitty," his online persona that played a pivotal role in the meme-stock frenzy of 2021, Gil's recent post on social media platform X has spurred speculation about his potential return to the spotlight. "Roaring Kitty is back, online forums are abuzz this morning," noted Rubner, suggesting that the market is bracing itself for another round of activity.

Rubner indicated that the bullish swings in GameStop's shares were propelled by the strategic acquisition of call options earlier in the month, a move that largely stayed under the radar until recently.

CTA and Systematic Equity Trends

Commodity trading advisers (CTAs) and other funds that often leverage systematic strategies for future contract trades have been proactive in bolstering their positions in US equities. The collective positioning in systematic equity, which encompasses CTAs, volatility control, and risk-parity funds, exceeded expectations following a reduction in long positions precipitated by a previous market downturn in April. "We've witnessed CTAs and other systematic strategies increasing their long equity positions within the US stock market," Rubner stated.

The 'Green Sweep' Phenomenon

According to Rubner, the next week could see a significant phenomenon known as the "green sweep," as exhibited by the majority of Goldman Sachs' models. This trend suggests an ongoing tendency among investors to persist in their commitment to US stocks and bonds, irrespective of potential market downturns. Given this propensity, the US 60/40 portfolio stands to potentially benefit this week, even more so than usual. "There is a discernible upside risk associated with the US 60/40 portfolio this week," asserted Rubner.

Projected Inflows into the US Stock Market

Rubner refrained from providing explicit expectations regarding the S&P 500’s movements. Nonetheless, he projected substantial inflows into US stocks, estimating them to be in the range of $7.6 billion to $13.2 billion over the succeeding week. Such capital injections could represent a decisive influence on the market trajectory.

Corporate Buybacks as a Market Catalyst

Furthermore, considering that over 90% of S&P 500 companies have finalized their first-quarter earnings reports, the market is amidst the "peak open window" for corporate buybacks. Goldman Sachs anticipates corporate demand for buybacks to approximate $5.5 billion daily until the midpoint of June. Notably, these buybacks serve not only as a robust indicator of corporate health but also as a catalyst for potential stock market growth.

For more insights on the role of Federal Reserve policies and corporate buybacks in bolstering stock market performance, click here.

Conclusion

As the market stands on the cusp of receiving pivotal inflation data, the actions of traders and investors in the coming week will be critical. The significant long positions accumulating across asset classes coupled with the revival of meme stock mania suggest a sense of optimism or, at minimum, a fear of being left out of forthcoming gains. With expert analysis provided by Goldman Sachs’ Scott Rubner, as well as the influence of corporate buybacks, traders, and the greater financial community, will be watching closely to discern the true impact on the US stock and bond markets.

©2024 Bloomberg L.P.

Source: Goldman Sachs. Source: Goldman Sachs FICC and Equities Futures Markets Strats team, as of 5/13/2024.

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