U.S. stocks experienced a sharp decline on Friday, yet Goldman Sachs views this as an opportune moment to add positions at lower prices.
On June 5th, the S&P 500 index fell by 2.6%, ending a nine-week winning streak. High-valuation sectors of the U.S. stock market were hit hard, with AI and semiconductor stocks leading the losses.
The Philadelphia Semiconductor Index plummeted over 10%, erasing more than $1 trillion in market value in a single day, marking its worst daily performance since March 2020.
On Friday, John Flood, a partner and head of Americas Equity Execution Services at Goldman Sachs, stated in a Bloomberg TV interview that this pullback was primarily driven by profit-taking ahead of the weekend and market anticipation of increased new stock supply, characterizing it as the type of sell-off that historically rewards buyers.
He also explicitly stated that there is a clear path for the S&P 500 index to reach 8000 points this year. Flood said there are not many opportunities to buy on dips this year, and historically, buying when the S&P 500 corrects by 2% has often been rewarding, a pattern he believes will continue to hold.
Nature of the Pullback: Profit-Taking
The stronger-than-expected U.S. non-farm payroll data for May ignited market concerns about a Federal Reserve rate hike within the year, leading to a surge in Treasury yields and a strong U.S. dollar, which in turn exerted broad pressure on global risk assets.
Flood believes the technical characteristics of this sell-off align more with a healthy adjustment. He identified inflation, geopolitical tensions involving Iran, and concerns in the private credit sector as the "wall of worry" commonly on investors' minds.
Flood pointed out that the very existence of such structural concerns is a sign of market health, not evidence of collapsing confidence.
Further supporting Flood's optimistic view is the picture presented by Goldman Sachs' internal cross-asset sentiment indicator.
This indicator aggregates positioning data from hedge funds, mutual funds, retail investors, and foreign investors. Despite the S&P 500 hitting 24 new all-time highs this year, this sentiment indicator remains hovering near neutral levels.
Flood said that even with the index-level market near historic highs, there remains a significant degree of concern in the market.
Goldman Sachs prime brokerage data shows that overall hedge fund exposure is near record highs, but while investors hold large long positions in AI and tech stocks, they also maintain substantial macro hedges through instruments like index futures and ETFs.
Flood believes that if hedge funds begin to unwind these hedge positions, it could potentially drive a new wave of stock market gains.
Meanwhile, mutual fund cash balances remain close to long-term averages, indicating there is still incremental capital waiting to be deployed.
Demand Side: Triple Support from Institutions, Retail, and Buybacks
A batch of high-profile IPOs, including SpaceX and Anthropic PBC, are expected to hit the market successively.
Flood believes this concentrated issuance window is supported by fundamentals and does not signal a market top.
From an institutional perspective, Flood stated that current market demand for new stock issuance is among the strongest he has seen in his career.
Following a major deal by Google this week, Meta is reportedly considering a large-scale stock offering to raise capital.
He argues that the massive equity financing activities by large tech companies reflect healthy market demand. He said there has never been such strong demand for these new issuances.
On the retail front, Goldman Sachs data shows that since the depths of the pandemic in March 2020, individual investors have never had a streak of net selling of U.S. stocks lasting more than a week.
Flood believes that as long as the labor market remains robust, this retail buying pressure will persist. He said that until we start seeing substantial job destruction, retail buying power is likely to remain a healthy constant for the market.
Additionally, Flood expects corporate buyback demand to balance out the new supply brought by IPOs, further stabilizing the market supply-demand dynamic.
Risk Factors: Systematic Funds and Earnings Disappointment
Flood also acknowledged two potential risks.
The first is positioning risk among systematic investors.
Commodity Trading Advisors and volatility control funds, after a strong rally, currently have relatively full exposure to the S&P 500. If the stock market weakens for several consecutive trading days, these funds could turn into sellers.
The second is risk at the corporate earnings level. Flood said that if you start seeing disappointing overall earnings for S&P 500 constituents, that would be highly concerning, but we are not seeing any signs of that yet.
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