Analysts at Goldman Sachs suggest that hedge fund positioning across US equities has created a setup for stocks to rip higher after their recent wobble. The market has been rather unstable in recent months, especially the last month amid the ongoing war in Iran. However, Goldman Sachs forecasts that the trend is coming to an end.
Speculative investors have largely held on to their bullish positions in individual stocks while building hedges through bearish bets on products such as exchange-traded funds and index futures. That short exposure now stands at the highest level since September 2022, data from the bank’s prime brokerage team show. Henceforth, an “extreme rally” could be in the cards over the coming months.
John Flood, Goldman’s head of Americas equities execution services and partner, says the dynamic reflects a market grappling with uncertainty stemming from the Iran war, as well as credit fears and worries over artificial intelligence. It could also, however, fuel outsized gains if good news pushes investors to unwind those hedges. “If we were to get a headline declaring the conflict over, you could see a sharp move higher at the index level,” Flood said in an interview. “It could be 2% to 3% in a straight line, and most of that would be that macro product covering.”
The stock market got a preview of this dynamic earlier this week, when US President Donald Trump said the war with Iran would resolve “very soon.” The S&P 500 closed 0.8% higher after an earlier 1.5% drop, with traders attributing much of the move to market participants buying back the securities they had shorted.