Wall Street Bulls Losing Steam! Goldman Sachs: US Stocks Lack Short-Term Fuel for Gains, $68 Billion in Selling Pressure Looms

Goldman Sachs (GS-US) traders believe US equities lack the 'fuel' to drive a major breakout in the short term, suggesting the S&P 500 index may continue to trade within a range of about 350 points for nearly two months. Despite recent pullbacks bringing investor positions away from extreme levels, overall risk appetite remains limited. With August typically seeing weak fund flows and the US midterm elections approaching, the market may need more time before resuming large-scale risk-taking.

Since early June, the S&P 500 has failed to break out of a roughly 350-point trading range. On Wednesday, it dropped 1.5%, closing at its lowest level since June 10. The Nasdaq 100 index fell sharply by 2.1%, widening its decline from June’s record highs to 11%. While tech giants continue pouring massive investments into artificial intelligence (AI), the return on investment remains uncertain. Meanwhile, persistently high oil prices could reignite inflation, further dampening investor confidence.

In a client report, Goldman Sachs traders noted that near-term catalysts to boost the market are limited. The market must first digest the 'debris' left over from the past few weeks before it can reasonably consider increasing risk exposure again.

Currently, global hedge funds’ total leverage stands at the 93rd percentile of the past five years, indicating already elevated risk exposure and limited room for further positioning. Mutual funds and foreign investors may remain cautious ahead of the November US midterm elections. Historical patterns show mutual funds often hold higher cash levels before elections, redeploying capital only after results are known. Foreign investors also tend to reduce their exposure to US stocks in the months leading up to elections.

August is traditionally one of the weakest months for equity fund inflows. According to Goldman Sachs, August and May rank as the months with the largest outflows from mutual funds and ETFs. Even as corporate share buyback demand gradually returns, it could be offset by fund outflows.

Retail investor participation is also cooling. Daily trading activity this month is over 3% below the five-year average for the same period, signaling another source of US equity demand is weakening. Data from Vanda Research shows retail investors sold individual stocks on Tuesday at the largest scale since the onset of the COVID-19 pandemic.

Trend-following systematic investors could become the next source of market volatility. Goldman estimates these strategies currently hold around $196 billion in US equities—sizeable but not extreme by historical standards. However, the S&P 500 has already fallen below a key trigger level for commodity trading advisors (CTAs).

If the index continues to decline, CTAs could sell approximately $15.7 billion in US stocks over the next week, with potential selling pressure expanding to about $68 billion over the next month, further deepening the market downturn.

For bulls, corporate share buybacks represent one of the few bright spots. Goldman’s buyback trading desk estimates that about 31% of S&P 500 component companies are currently in their open buyback windows. This proportion is expected to surpass 50% by the end of next week and reach 90% by mid-August.

Goldman notes that buybacks will bring back one of the largest and most stable sources of buying demand to the market, serving as the most reliable support during August. However, amid fund outflows, election-related caution, retail pullback, and potential algorithmic selling pressure, buyback demand may only limit downside, not drive a meaningful upward breakout.