A senior executive from Wall Street giant Goldman Sachs, John Flood, has indicated that investors should prepare for a potential short-term pullback in the stock market. This caution comes as equity positions, both in the U.S. and globally, have become increasingly crowded, and one of the key institutional forces—Commodity Trading Advisors (CTAs)—is expected to shift from strong buying to selling pressure. Ahead of this week's earnings releases from five major tech giants, including Alphabet (GOOG), Microsoft (MSFT), and Apple (AAPL), multiple Goldman Sachs strategists, including Flood, have warned that a combination of factors could trigger a near-term correction. These factors include the exhaustion of marginal CTA buying, pension fund rebalancing selling pressure, deleveraging by hedge funds, and deteriorating market breadth indicators. However, the Goldman Sachs strategist team emphasized that the medium- to long-term bull market outlook for equities remains intact, and any pullback should be viewed as a significant opportunity to buy or allocate to stocks at lower levels.
John Flood, a Goldman Sachs partner and head of Americas Equity Execution Services, stated in a recent research report that he expects the S&P 500 index to continue rising significantly by the end of the year. Nevertheless, he highlighted warning signals suggesting the benchmark index could experience a sharp sell-off in the near term. In the report dated Sunday, he clarified that such a downturn should be considered a major buying-on-dips opportunity. The latest market outlook from Goldman Sachs strategists is not a prediction of the end of the bull market, but rather a recognition that the AI-driven rally has been too rapid, positioning has become too extended, and marginal buying power is waning, making U.S. and global risk assets susceptible to a correction. They characterize any such pullback as a rebalancing within a bull market rather than the start of a bearish trend.
Strategists, including John Flood, specifically pointed out that CTAs, after purchasing approximately $53 billion in equities over the past month, are no longer marginal buyers. They noted that pension fund rebalancing at month-end could result in over $25 billion in selling of U.S. stocks, and hedge funds have been reducing leverage during the recent rally. Despite these near-term headwinds, Flood expects the S&P 500 to be "significantly higher" by year-end and defines any potential pullback as a buying opportunity. Systematic strategy funds, particularly CTAs—often referred to as "fast money"—could become a key catalyst for selling. The Goldman Sachs team led by Flood indicated that after buying around $53 billion in equity assets over the past month, CTAs now hold approximately $32 billion in long positions on the S&P 500 and may soon cease being major buyers. According to Goldman's trading desk models, if the market enters a temporary consolidation phase, these funds could turn into sellers; selling pressure would intensify if the market declines.
Large-scale pension fund rebalancing at month-end is also expected to weigh on U.S. and global equity markets. Flood's team predicts that pension funds may sell over $25 billion in U.S. stocks, a potential selling volume that ranks among the top 15 such estimates by the firm since 2000. Excluding quarterly expiration dates—which combine monthly and quarterly rebalancing—this would represent the largest estimated monthly sell-off on record, the strategists added. Meanwhile, in the hedge fund sector, overall leverage has decreased substantially as fund managers actively covered short positions during the recent rebound. Data from Goldman Sachs' prime brokerage business showed that overall trading activity declined last week for the first time in 13 weeks, suggesting leveraged hedge funds may have little capacity to buy stocks in the short term. According to the firm's statistics, hedge funds used the U.S. stock market rally to reduce risk, cutting the total size of their long and short equity positions by the largest margin since last September.
By the close of trading on Tuesday, the S&P 500 and Nasdaq 100 indices paused, pulling back significantly from record highs after a substantial surge in April. Driven by resilient corporate earnings and optimism over easing U.S.-Iran tensions, both benchmarks are still on track for their strongest monthly performance in years. The rapid advance has pushed key indices into overbought territory and substantially increased investor exposure. Goldman Sachs' U.S. equity sentiment indicator has also reached levels indicating crowded positioning. Concurrently, market breadth has deteriorated notably. The Philadelphia Semiconductor Index, a key gauge for the semiconductor sector, recorded a record 18-day winning streak. The gap between the 52-week highs of the S&P 500 index and its median component is among the widest since 2020, highlighting the concentration of the rally in AI computing infrastructure leaders such as Intel, AMD, Broadcom, and Micron. This concentration makes equity assets increasingly vulnerable to any reversal, especially as some of the world's largest tech giants—Alphabet (GOOG), Microsoft (MSFT), Amazon (AMZN), Meta Platforms (META), and Apple (AAPL)—are set to report their latest quarterly results in the coming days.
More precisely, Goldman Sachs' concerns center on the potential for a "technical/positioning-driven pullback" triggered by a combination of factors: heightened volatility following the tech giants' earnings reports, large-scale selling from CTAs and pension funds, overheated semiconductor stock prices closely tied to AI computing infrastructure, and persistent pressure from oil prices and interest rates due to the stalemate in U.S.-Iran tensions. However, from a medium-term perspective, as long as AI capital expenditure, corporate earnings, stock buybacks, and cash flows from tech giants continue to strongly support fundamentals, Goldman maintains that the primary trend remains upward within a bull market context. According to reports, Tony Pasquariello, head of Goldman Sachs' hedge fund business, shares a similar view to senior executive John Flood: the bull market is far from over, but chasing the rally is not advisable, nor is shorting the market. The preferred strategy is to maintain core long exposure while waiting for a pullback to deploy capital at lower levels. In other words, Goldman Sachs is not calling for a retreat but is cautioning investors against buying at the most crowded and overheated levels. The truly opportune entry point for allocating to equities in the short term may come from an impending downward correction.
Tony Pasquariello emphasized the risk of a local "blow-off top" in technology and semiconductor stocks. The Philadelphia Semiconductor Index's sharp monthly surge, elevated RSI technical indicators, and extreme deviation from the 200-day moving average suggest that the optimistic narrative surrounding the AI computing supply chain has been rapidly, concentratedly, and even squeezefully priced in. The key issue is not the absence of AI demand, but that the market has become overly crowded in trading the assumption of perpetually rising AI capital expenditure and indefinitely expanding semiconductor profits. Goldman's U.S. equity sentiment indicator has risen to levels indicating tight positioning; historically, such readings have often preceded subdued returns over subsequent weeks. Coupled with the concentration of tech giant earnings reports and deteriorating market breadth, where the rally relies increasingly on a few large AI-related stocks, the margin for error in the short term naturally decreases.
Rich Privorotsky, Goldman Sachs' Delta-One head, issued a macro warning based on combined pressures from oil prices and interest rates. If the situation with Iran does not normalize quickly, an oil price shock would not be a one-time event but would persistently transmit through gasoline prices, shipping costs, inflation expectations, corporate expenses, and nominal interest rates. Goldman Sachs has raised its Q4 average Brent crude price forecast to $90-$100, with extreme scenarios discussing even higher oil price risks, indicating that energy markets are repricing the persistence of geopolitical conflict. If oil prices remain elevated, it becomes more difficult for the Federal Reserve to pivot quickly to easing, and longer-dated Treasury yields, such as the 10-year, are more likely to face upward pressure. This would directly challenge the discount rate assumptions supporting high-valuation tech stocks.
From an investment strategy perspective, the narrative of the AI computing bull market is not over, but this earnings season represents an "ROI verification moment," not a "victory lap." The overall direction of the AI investment theme remains bullish. The real change is that capital is likely to continue flowing from broad AI concepts towards segments with the firmest cloud computing orders, tightest supply constraints, and clearest commercialization paths. Whether the global equity bull market continues its surge depends on whether the five major tech giants can simultaneously demonstrate clear expansion trajectories in three areas: continued robust AI capital expenditure, increasingly清晰的 AI-related revenue realization paths, and manageable margin/cash flow pressures without loss of control.
The logic at Morgan Stanley aligns with that of Citigroup: the primary signal for judging AI investment returns is the acceleration of revenue from AI-related businesses, not merely the scale of AI capital expenditure. The critical question is whether these trillion-dollar market cap giants can maintain their aggressive AI computing infrastructure investment cycles, driven by the AI wave, against a backdrop of increasingly clear AI revenue generation and monetization paths. Alphabet needs to demonstrate that its cloud business and cloud AI computing-related revenues can absorb depreciation pressures. Microsoft must show that demand for Azure computing power still exceeds supply. Meta Platforms needs to prove that AI-driven advertising cash flow growth is sufficient to cover AI infrastructure expansion. Amazon must demonstrate credible paths for AWS customer commitments and the realization of AI computing infrastructure capacity by 2027-2028. Meanwhile, another Wall Street giant, JPMorgan Chase, has raised its year-end target for the S&P 500 to 7600, citing in part AI-driven earnings revisions and momentum in the technology sector, indicating that mainstream Wall Street capital still largely believes the AI-driven market trend has further to run.
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