As stock markets hit new highs, Goldman Sachs has issued a warning that retail investor behavior has undergone a substantial shift, evolving from "buying the dip" to "chasing the fervor." This suggests the market may face some degree of downward pressure in the near term to absorb the froth accumulated during the recent surge to record levels.
A recent Goldman Sachs report on fund flows indicates that the market could be poised for a pullback. This comes as demand from Commodity Trading Advisors (CTAs) recedes, end-of-month selling pressure from pension funds emerges, and the passive buying driven by retail tax refunds begins to fade.
At current price levels, market makers are in a positive gamma position. Their typical practice of buying low and selling high has helped to moderate overall market volatility. However, with retail investors showing intense enthusiasm for leveraged semiconductor products, the implied volatility for related individual stocks and the sector remains elevated.
Looking ahead to May, corporate share buybacks are expected to provide modest support. Driven by long-term growth narratives, a busy season for Initial Public Offerings (IPOs), and catalysts from the earnings season, the Nasdaq is favored to outperform the S&P 500.
CTAs have transitioned from being net buyers to net sellers, signaling a withdrawal of systematic demand. Over recent weeks, buying from CTAs provided clear and sustained demand support for the market. Data shows that the increase in positioning by major US systematic strategy groups over the past month was the second-largest since 2016, with these strategies collectively purchasing nearly $80 billion in US equities. CTAs themselves currently hold a net long position of $44 billion.
However, this source of demand appears exhausted, and CTAs have now turned into slight net sellers. The S&P 500 is currently trading 3.75% above its short-term threshold and 4.83% above its medium-term threshold. If these thresholds are breached, CTAs are projected to sell approximately $50 billion in US stocks to flatten their exposure. Calculations suggest that over the next week, CTAs will be net sellers regardless of market direction: selling around $7.7 billion in a flat market, $2.3 billion in a rising market, and up to $17.5 billion in a declining market.
Significant end-of-month selling pressure from pension funds, elevated institutional positioning, and rising risk appetite add to the near-term caution. US pension funds are estimated to sell approximately $27 billion in US equities at month-end. This scale ranks in the 86th percentile for all month-end flow estimates over the past three years and the 93rd percentile historically since 2000. Notably, this is the largest estimated single non-quarter-end selling event since 2000.
After experiencing its largest deleveraging since September 2025 last week, the overall gross leverage of institutional balance sheets had decreased by 0.7 percentage points to 308.3% by Monday's close. This level remains high, sitting at the 84th percentile for the past year and the 97th percentile for the past five years. Positioning by non-dealers in US equity index futures is also elevated, at the 89th percentile for the past year. High institutional exposure reduces the likelihood of a short squeeze, supporting the case for a near-term pullback. However, from a longer-term perspective, such a correction could help deflate the bubble built up during the market's rapid ascent.
Goldman Sachs' sentiment indicator rose to +1.5 last week, indicating that investor positioning is already at elevated levels. Concurrently, a global risk appetite indicator, which was at the 34th percentile just a month ago, has now surged to the 99th percentile for the past five years. This rapid increase could serve as a warning signal; if the prevailing market consensus is challenged, investors could face significant downside risk.
While index-implied volatility has declined substantially since the onset of recent geopolitical tensions, the average one-month implied volatility of individual S&P 500 components remains resilient. This suggests a shift among investors from relying on broad market beta returns towards actively selecting individual stocks. The current spread between average single-stock volatility and index volatility is at the 99th percentile historically, whether looking at a one-year or five-year timeframe. From the perspective of market maker gamma exposure, their current positive gamma status around spot prices leads to a "buy low, sell high" dynamic to maintain risk neutrality, which somewhat dampens price volatility.
Not all signals are pessimistic. Support is expected from the Nasdaq's seasonal advantages and corporate buyback activity. As companies report earnings and enter their buyback blackout windows, share repurchases are anticipated to re-enter the market starting this week. Currently, about 40% of listed companies are in an open window for buybacks, a situation expected to persist until June 12th. The total value of buyback authorizations year-to-date for 2026 has reached $502.3 billion.
Seasonal data also favors the Nasdaq. Historically, May is the third-best performing month for the Nasdaq, while it is the third-worst for the S&P 500. Goldman Sachs believes that a focus on long-term growth stories, a dense IPO calendar, and catalysts from the earnings season could help this historical pattern hold true this year.
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