Amid escalating geopolitical risks and a notable rise in market volatility, Goldman Sachs’ (GS) trading desk has issued a warning, advising investors against hastily turning bearish on US stocks. The firm believes the current market structure is actually more prone to triggering a “short squeeze” should positive news emerge.
In terms of market performance, the S&P 500 is on track for its worst monthly performance since 2022, while the Nasdaq has entered a technical correction. Although Goldman Sachs does not see a clear near-term path for an upward move, its trading team believes the current selling pressure is nearing an end, making it riskier to add to short positions in this context. The firm’s strategy team noted in a report that while markets require hedging and flexible positioning, “given that current positioning is sensitive to short squeeze risks, we do not recommend turning to shorting.”
Data shows that trend-following funds (CTAs) have sold approximately $55 billion worth of US stocks this month, with net short positions now standing at $18.4 billion. Goldman Sachs believes that unless a new macro shock emerges, this round of systematic selling “is close to exhaustion,” and the market’s risk-reward structure is gradually tilting to the upside. Meanwhile, risk-parity and volatility-control strategies continue to reduce equity exposure, with risk-parity strategies having already trimmed over $20 billion globally, accounting for roughly one-sixth of their total long positions.
However, from a fund flow perspective, there has been no significant “retreat” from the market. Equity fund inflows remain steady, household investors have barely reduced their equity holdings, and fundamental investors’ overall positions remain near historical highs. This suggests that if positive news, such as a geopolitical easing, emerges, the market could see an amplified rebound.
On the geopolitical front, the US and Israel recently carried out strikes on several Iranian nuclear facilities and steel targets, while Iran continues to launch counterattacks in the Persian Gulf, further heightening market uncertainty. Additionally, Goldman Sachs expects month-end pension fund flows to bring about $14 billion in net inflows to US stocks, providing some support to the market. Retail investors have only slightly reduced their equity allocation by about 1% from recent highs, indicating sustained long-term confidence in US stocks. Goldman Sachs noted that despite lingering short-term uncertainties, as month-end flow factors are gradually priced in, the market may enter April with a clearer trajectory.
Despite heightened geopolitical risks and increased macro uncertainty dampening market sentiment, Citigroup (C) maintains an optimistic outlook on the benchmark US stock index, leaving its full-year target unchanged. In its latest client report, Citi reiterated its year-end base case forecast for the S&P 500 at 7,700 points. This projection is based on an earnings per share estimate of approximately $320, which the firm believes may even be conservative. Additionally, Citi outlined a bullish scenario where the S&P 500 could climb to 8,300 points, driven by stronger-than-expected corporate profit growth and modest valuation expansion. In a bearish scenario, the index could retreat to 5,700 points if fundamentals weaken and valuations contract.
Citi noted that the challenges currently facing the market are mounting, including escalating geopolitical conflicts related to Iran, alongside structural disruptions from artificial intelligence, potential risks in the private credit market, and uncertainty surrounding global trade policy. Despite these factors, the firm stated it is not adjusting its full-year forecast for now. The report said, “We are maintaining our year-end targets for now.”
