Goldman Says ‘Extremely’ Stretched Stock Exposure Risks Pullback

U.S. equity positioning looks “extremely” stretched after the recent rally to an all-time high, which increases the risk of a modest pullback in the next month, according to Goldman Sachs Group Inc.

Although that may hamper short-term returns, Goldman still expects “significant” equity market upside in 2021, given the prospects of coronavirus vaccine distribution and a V-shaped recovery, the firm’s strategists led by Arjun Menon wrote in a note. They echo peers at JPMorgan Chase & Co., who this week highlighted “toppy” market technicals in the near term, while remaining positive on the outlook for stocks next year.

U.S. stocks have surged in the past month as progress on vaccines boosted bets of a return to normality, while Joe Biden’s presidential win added to positive sentiment. A recent surge in Covid-19 hospitalizations and weaker-than-expected economic data raises the risk of a short-term pullback, said Goldman strategists. But they noted that factors including a low interest-rate environment and fund flows support the medium-term outlook.

Goldman Says ‘Extremely’ Stretched Stock Exposure Risks Pullback

“From a flow of funds perspective, we expect investors will continue to shift assets away from money market funds and towards equities,” the strategists wrote. “While the stock market has climbed to an all-time high and equity allocations are elevated, yields on cash remain near zero.”

Meanwhile, a key sentiment indicator for U.S. stocks has reached its most bullish level in two decades. The weekly Cboe ratio of volume traded in puts versus calls fell to the lowest since July 2000 last week, just as the S&P 500 hit an all-time high.

Goldman Says ‘Extremely’ Stretched Stock Exposure Risks Pullback

The emergence of multiple viable vaccines in the past month has spurred a strong rally in global equities and bullish calls for the trend to continue into next year. Large inflows into U.S. stock funds have been the key driver of Goldman’s own sentiment indicator, with the broker noting $52 billion has poured into U.S. stock mutual funds and exchange-traded funds since the start of November -- the most relative to assets during any five-week period since March 2017.

Still, Goldman said stretched positioning alone may not be negative for forward equity returns because when it has occurred alongside economic growth it has historically been followed by gains in the two-month period afterward. The broker is sticking to its end-2021 forecast of 4,300 for the S&P 500, implying 16% upside from Monday’s close.

©2020 Bloomberg L.P.

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