Goldman Sachs Warning: Weakening Liquidity Combined with Giant IPOs Incoming, Pension Fund Sell-Off Impact at Month-End May Exceed Expectations

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Boosted by a strong earnings season, US stocks continue to rise, but underlying market pressures are quietly mounting. According to the latest report from Goldman Sachs, institutional holdings are crowded and liquidity is weakening, compounded by large upcoming IPOs siphoning off capital, presenting considerable potential market disturbances around the end of the month.

Goldman Sachs’ equity team—Gail Hafif, Brian Garrett, and Lee Coppersmith—point out in the report that US stocks are about to face approximately $1.4 billion in month-end pension fund selling, ranking in the 80th percentile historically, and representing the 12th largest non-quarter-end sale on record.

Meanwhile, S&P 500 order book liquidity is currently only $9.445 million, 24% lower than the year-to-date average. Goldman Sachs warns that against this backdrop of already diminished liquidity, the impact of this round of pension fund selling may surpass that seen in April.

In terms of market impact, Goldman Sachs believes that subsequent rallies are more likely to be driven by short squeezes in underweighted stocks, rather than continued gains in momentum leaders. If the market fails to broaden beyond AI sectors, and with market makers holding excess local gamma positions, the market may remain tepid until a new catalyst emerges.

Hedge Fund Leverage Rises; Technology Positions Hit Five-Year Highs

Hedge fund net exposures have continued expanding amid the recent rebound, now reaching a one-year high. Total leverage ranks at the 94th percentile for the past five years. At the same time, short positions in S&P 500 constituent stocks amount to 3.0% of market cap, the highest since the end of 2011.

At the sector level, Information Technology was the largest net nominal buy globally this week, with net buying at its fastest pace in nearly three months. Both total and net exposures to information technology (as a share of US prime broker books) rose to the 100th percentile over the past five years.

High short interest combined with concentrated holdings suggests the next rally could be even more "painful"—especially if short squeezes break out in lagging sectors.

Short positions are particularly notable in defensive sectors. Short interest in healthcare stocks is at a 30-year high, with utilities and consumer staples also near historical peaks, implying rising upside risks in these areas.

Mutual Fund Cash Allocations Remain at Historic Lows; Large IPOs Will Siphon Funds

Around major IPO events, mutual fund cash balances typically rise first and then fall—a median 3% increase in the month before an IPO, followed by a 2% decline in the subsequent month.

In line with this trend, mutual fund cash allocations have edged up modestly from the historic low of 1.1% at the beginning of 2026 to 1.4% at the start of April, but current cash allocations remain at extremely low levels compared to history.

While this factor in itself is not a significant barrier for the stock market, available cash for buying is quite limited; for passive funds, as new stocks are included into indexes, existing holdings may come under passive selling pressure.

For the week ending May 20, global equity funds saw net inflows stay positive at $2 billion, but this was a sharp drop from $20 billion the previous week; US market inflows likewise slowed significantly, with the latest week at $9.49 billion compared to $21.9 billion the prior week.

Pension Sales at 80th Percentile, Weakening Liquidity Amplifies Impact

US pension funds will sell approximately $1.4 billion of US stocks at the end of this month, ranking in the 69th percentile of all buy/sell (absolute value) estimates in the last three years, and as high as the 80th percentile since January 2000, making it the 12th biggest non-quarter-end sale on record.

A similar trend occurred in April but had limited impact; into May, as S&P 500 order book liquidity has fallen to the 33rd percentile over the past year and is 24% below the year-to-date average, concentrated pension sales now have greater price impact potential.

Summer liquidity trends typically weaken further. If markets broaden beyond AI-related sectors, the ability to quickly shift risk becomes crucial, and this technical factor could accelerate any "painful rallies."

Buybacks Offer a Hedge, Retail Investors Remain a Key Support

On buybacks, Goldman Sachs' trading desk saw repurchase activity accelerate about 40% week-over-week last week. Year-to-date, weekly activity is at 1.6x and 1.8x the daily average for the same periods in 2025 and 2024, respectively, focused on tech, financial, and discretionary sectors. High activity is expected to last through around June 12, providing solid support to US stocks.

Retail investors have also played an important role in the current rebound, with their net buying imbalance reaching a stage high during the latest market correction.

However, Goldman Sachs also notes that both the University of Michigan Consumer Expectations Index and the Current Economic Conditions Index were revised in May to their lowest levels on record, with the former dropping to 44.1 and the latter to 45.8. Goldman Sachs says it will continue monitoring if geopolitical events further erode retail investor appetite for equities.

On volatility, the Goldman Sachs Fear Index is now at 3.16 (out of 10), far below the 9+ levels seen at the onset of recent conflicts. Overall market sentiment has stabilized, and risk premiums for large drawdowns have narrowed significantly.

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