Prepare for an ‘extreme’ stock rally, banking giant warns

American banking giant Goldman Sachs’ trading desk has stated that hedge fund positioning in U.S. equities could set the stage for a sharp stock market rally if positive catalysts emerge.

In this case, data from the bank’s prime brokerage unit shows speculative investors have largely maintained bullish positions in individual stocks.

At the same time, they have increased hedges through bearish bets on exchange-traded funds and index futures. As a result, short exposure in these macro products has climbed to its highest level since September 2022.

The positioning reflects heightened market uncertainty driven by the Iran war, credit concerns, and fears surrounding artificial intelligence.

Despite the defensive hedging, the setup could amplify gains if investors rush to unwind short positions following positive developments.

To this end, John Flood, head of Americas equities execution services at Goldman Sachs, said a clear signal of resolution in the Iran conflict could quickly lift major indexes by about 2% to 3% as traders cover macro shorts tied to ETFs and index futures.

Hedge fund gross exposure, which measures the total value of long and short positions, is near an all-time high at about 307%. 

The elevated exposure, combined with heavy shorting of macro products, increases the potential for a sharp upside move if market sentiment improves.

Stock markets quick reaction 

Notably, the bullish outlook comes as recent trading has already shown how quickly markets can react to headlines. 

For instance, earlier this week, President Donald Trump said the conflict with Iran could be resolved soon, helping the benchmark S&P 500 close 0.8% higher after falling as much as 1.5% earlier in the session. 

“If we were to get a headline declaring the conflict over, you could see a sharp move higher at the index level. <…> Right tail risk is more extreme than left tail risk right now,” Flood said. 

Even after the rebound, the benchmark index remains nearly 3% below its recent highs, with many individual stocks posting deeper losses.

Meanwhile, other investor groups are taking a more cautious stance. Long-only asset managers, including traditional money managers and sovereign wealth funds, have largely moved to the sidelines after strong gains earlier in the year, waiting for clearer signals on the geopolitical outlook.

Corporate activity has also supported the market, with Goldman Sachs reporting that companies used the recent pullback to accelerate share buybacks. Its corporate buyback desk recorded one of the busiest weeks for executing repurchases in three years.

Featured image via Shutterstock