Goldman Sachs traders: The U.S. stock market is already prepared for a pullback this week.
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Last Friday, the S&P 500 hit a new all-time high, and Goldman Sachs’ trading desk immediately issued a warning—the current rally has pushed the market to the threshold of a correction.
John Flood, Goldman Sachs’ Head of U.S. Trading, wrote in his weekend client report that the market "is starting to feel a bit stretched." In response to clients asking "why does the market keep rising," Flood's core assessment is: total leverage remains high while net leverage is relatively low—"This is the perfect storm for the right-tail risk we warned about at the end of March’s low, which has gradually materialized over the past two weeks, peaking last Friday."
He further said: “The market is now fully primed for a correction next week (i.e., this week).”
Meanwhile, geopolitical tensions escalated over the weekend. The Strait of Hormuz was closed again, and on Monday’s Asian session, Brent crude oil surged as much as 7.9% to $97.50/barrel, WTI rose over 7% to around $90/barrel, S&P 500 futures dropped 0.7%, and Nasdaq 100 futures fell about 0.9%—last week’s gains are facing immediate reversal pressure.
Leverage Structure Imbalances, Technical Tailwind Fading
The core logic of Flood's warning hinges on the leverage structure of the U.S. market.
According to Goldman Sachs PB data, the overall account total leverage is at 310%, placing it in the 92nd percentile for one year, and the 98th percentile for five years—in other words, over the past five years, leverage was lower than current levels 98% of the time.
At the same time, net leverage is only 75%, in the 21st percentile year-to-date. High total leverage and low net leverage mean market positioning is crowded, but directional bets remain uncommitted—once sentiment reverses, the pressure to deleverage will be unleashed all at once.
Flood points out that purely from a technical perspective, the rally could continue for a while—provided net leverage rises to above the 50th percentile for both the one- and five-year averages. Currently, we are still far from this threshold.
Another force behind the rally—CTA strategy funds—is also nearing its end. According to Flood, CTAs bought $33 billion S&P 500 this week, and are expected to buy another $23 billion next week. However, he clearly warns: “The highest demand from this group has passed.”
Goldman trading desk colleague Brian Garrett also confirmed this in his Sunday night report: “The technical tailwinds from macro short covering and CTA system demand are ending. Over the next two weeks, earnings season will be the real moment of truth.”
Mega Cap Leaders Driven by Short Covering, Not Fundamentals
In this rebound, the performance of tech giants and the “Magnificent Seven” is particularly outstanding. Garrett explains the underlying mechanism:
"For every $1 of SPY/E-mini shorts covered, 37 cents in ‘leader’ stocks are net purchased."
Over the past three weeks, large cap stocks' excess returns versus equal-weighted S&P 500 reached 1,330 basis points—one of the largest price gaps in history.
Meanwhile, bullish options volume for large caps is surging sharply.
Flood notes that from client conversations, there is genuine belief in the next AI rally, with focus on energy, industrials, and hardware suppliers (LNG, ET, LGN, AMAT, MRVL, etc). Non-AI long interest is mainly in healthcare. Meanwhile, hedge funds are shifting from macro short covering to buying individual stock longs.
Earnings Season: The Next Key Variable
Another factor supporting the bulls is the start of earnings season. Flood notes that Q1 earnings are off to a solid start, and next week companies accounting for 24% of S&P 500 market cap will report results, providing more directional signals for the market.
Additionally, ETF trading volume has fallen back to 30% of total turnover, now matching the historical average—in March, this ratio briefly exceeded 40%. S&P 500 order book depth has also rebounded sharply from last month’s low of $2 million to $9 million, signaling notably improved liquidity.
However, Garrett characterizes the current market environment with caution: “This feels like déjà vu from April 2025 (after reciprocal tariff day)... This is still a very hard market to grasp.”
Goldman Sachs Trading Desk: Five Trading Directions
While warning of the correction, Flood and Garrett also offered five trading directions under current conditions:
1. Bullish Emerging Market Stocks Flood references colleague Tony Pasquariello's comment on Korea: "If I told you, you could buy a market where consensus expects profit growth over 200%, and a forward PE of only 7, what would you think?" For US trading tools, EWY is preferred. Also, KWEB’s bullish options volume reached 400,000 contracts last Friday.
2. Revalue Volatility, Trade Tail Risk Goldman’s trading desk executed S&P 500 lookback puts this week—the cost of a 3-month, 95% lookback put is currently lower than before the conflict broke out and only slightly above the five-year average.
3. Upside Volatility Is Cheap Enough to Express Directional Views Bears can short heavy delta positions; bulls can directly hold right-tail options. Goldman’s models show that if the market rises another 2%-3% from here, market makers will face a significant S&P 500 gamma short exposure, potentially triggering a chain reaction of “spot up, volatility up, and gamma chasing.”
4. Buy Calls on Short Squeeze Candidates The cost of a 3-month 10% weighted average call on Goldman’s flagship index GSXUMSAL is about 85 vols, while a basket of options costs 25-30 vol points less.
5. Go Long Fertilizer-Related Trades The Middle East conflict has a chain effect lasting over 6 months on the grains complex—fertilizer supply chain disruptions mean soft commodity costs will rise next year. Goldman is pricing calls on the BCOMGR index, with implied volatility around 22. Garrett points out more “medium-term affected” trading opportunities, such as airlines and jet fuel.
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