Goldman Sachs: Expecting a systemic shift back to buying U.S. stocks

Goldman Sachs’ trading desk said that after cutting stock exposure to multi-year lows amid the recent market selloff, systematic investors are getting ready to shift back toward buying stocks.

In a report to clients on Monday, Goldman said these so-called “fast money” funds—including commodity trading advisors (CTAs) and volatility target strategies—sold about $240 billion in global equities during the past month’s market decline. However, this selloff appears to be fading: traders expect the group may turn to net buying of about $55 billion over the next month, including about $20 billion flowing into U.S. stocks.

Goldman expects this shift to be gradual, with buy-side momentum amounting to only about $5 billion in the coming week, so the near-term impact could be fairly limited.

Goldman managing director Lee Coppersmith wrote: “This kind of mechanical bid is improving, but it’s more like a tailwind in the middle of the month rather than providing support right away.”

This change could mean the recent U.S. stock market selloff is nearing a turning point. Previously, investors’ sentiment was pressured by a spike in oil prices triggered by the Iran war, and the S&P 500 at one point fell about 9% from its all-time high. Although the U.S. equities market has shown early signs of a rebound recently, the trajectory of the conflict remains uncertain.

The strength of the near-term rebound will determine how aggressively these funds add to positions. Goldman’s model shows that if the S&P 500 rises by about 8% over the next month, the global buying capacity of systematic funds could expand to $220 billion, with more than half flowing to the U.S. market. Conversely, if it falls by another 10%, it could trigger additional selling of about $110 billion.

Key technical levels may point the direction for the market. Paul Leyzerovich of Goldman noted that the S&P 500’s 6720 to 6740 range is a key “re-entry zone,” at which point short-term and medium-term trend signals would turn positive, potentially accelerating inflows to trend-following strategies. The index is currently near 6600.

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