Goldman Sachs warns: U.S. stocks have reached an extreme level of crowding, and the market will remain volatile in the future.

The US stock market is accumulating a new round of volatility risk amid record-breaking capital activity and extremely crowded positioning structures.

John Flood, Head of Equity Flow Strategy and Partner at Goldman Sachs, warns in his latest market assessment report that although investor sentiment remains fairly balanced overall, crowding on both the long and short sides has approached the most extreme levels in the past five years. Combined with short-term selling pressure from quarter-end pension rebalancing, investors should be prepared for ongoing volatility.

Meanwhile, Goldman Sachs has lowered the probability of a US economic recession from 25% to 15%, and raised its forecast for GDP growth in the second half of the year to 2%, indicating that the overall fundamentals remain supportive.

The most immediate short-term pressure facing the market comes from technical quarter-end selling. Early next week, about $30 billion worth of US stocks will be sold due to quarter-end pension rebalancing, a scale in the 89th percentile among all estimated buy-sell flows over the past three years and the 95th percentile since January 2000.

Crowding nears five-year extremes, momentum factor exposure at record highs

John Flood, referencing Prime Book data, points out that there are three noteworthy thematic trends currently in the market, with crowded positioning being the most prominent.

Data shows that both the Long Crowdedness and Short Crowdedness factor exposures are approaching the most extreme levels of the past five years. Meanwhile, medium-term momentum factor exposure remains near the 98th percentile of the five-year review period, signaling a record-high dependency on trend trading. Should the trend reverse, deleveraging pressure would be quickly amplified.

On the sentiment indicator front, the US stock sentiment indicator is currently reading +0.3, the lowest level since early April. Among its nine components, US institutional investors raise the greatest concern. The AAII bullish sentiment index currently reads 36, below the year-to-date average and far off this year's highs.

Regarding hedge funds, Prime Brokerage data shows the gross leverage of US long-short strategies is 207.3%, at the 4th percentile over the past year; net leverage is 54.5%, at the 74th percentile over the past year. Flood believes overall hedge fund positioning has not reached extreme levels, but structural changes in tech are noteworthy—the exposure to US information technology has rapidly risen to a near five-year high, while the "Mag 7" stocks’ aggregate and net long-short exposures have both dropped to the lowest level in a year, mainly driven by short selling since June. Flood notes this may present some interesting long-entry opportunities.

Record capital market activity smoothly absorbed by the market

Despite increasingly extreme positioning structures, the US stock market has shown considerable resilience in the face of recent record-breaking capital market activity.

On June 3, Alphabet (Google's parent) completed a $40 billion equity financing, setting a record for the largest ever primary market equity raise by a US firm, surpassing Boeing’s $25 billion in 2024. However, this record lasted only 6 trading days—on June 12, SpaceX completed a $75 billion IPO, resetting the record. The combined $115 billion in new stock was smoothly absorbed by the market in under two weeks.

Flood notes that ahead of the SpaceX IPO, the market was concerned long-term institutional investors might sell existing holdings to free up funds. However, Goldman’s trading desk observed no significant financing-related selling by asset managers or sovereign wealth funds. Mutual funds currently hold about $170 billion in cash, near historical averages, thus the market still has ample "dry powder."

Continued buying by retail investors is another key support. On June 18 (when Russell index rebalancing coincided with SpaceX's listing), US stock exchanges saw a daily trading volume of 33 billion shares, setting the all-time single-day record, surpassing the 30 billion shares on "Liberation Day" April 9, 2025. Flood believes retail demand will remain robust through year-end, providing a tailwind for the market.

Record semiconductor positioning, signs of broader sector rotation

Looking at Prime Book fund flows, the semiconductor and semiconductor equipment sector continues its strong attraction for capital. This sector was the most net-bought globally in 2025, and again topped the list in the first half of 2026, with net allocation doubling year-to-date to the highest levels ever recorded. Most buying activity this year has been led by Asian chipmakers.

Meanwhile, since June, US single-stock fund flow signals noteworthy broadening—8 of 11 sectors posted net inflows, led by financials, industrials, and consumer discretionary; information technology and energy saw the largest net outflows. Flood believes, if this broadening trend continues into the second half of 2026, it will be a positive signal for the market.

Inflation and rate hike risks are the primary concern for the second half

On the fundamentals side, the earnings outlook remains optimistic. In Q1, S&P 500 constituent earnings per share (excluding one-offs) grew 18% year-over-year; median stock earnings growth was 14%, marking one of the strongest quarters in the past decade. If the S&P 500 breaks 8,000 in 2026, earnings will be the core driver, with AI infrastructure-related stocks expected to contribute about half of this year’s S&P 500 earnings growth.

However, inflation and rising interest rate risks have become the main concern heading into the second half. Flood notes that the first FOMC meeting chaired by the new Fed chairman Warsh was more hawkish than the market expected—of the 18 participants submitting rate projections, half anticipate one or more rate hikes for the remainder of 2026, and the median forecast for Q4 2027 core PCE inflation is up to 2.5%.

In response, Goldman Sachs economists maintain their base forecast unchanged, believing that no rate hike remains the most likely scenario. The reasoning: about half of the rate hike projections come from non-voting regional Fed presidents, while most voting members still favor holding rates steady or lowering them; additionally, rapid improvement in the Middle East situation and sharp declines in energy prices may render these projections outdated. Accordingly, the US recession probability is simultaneously lowered from 25% to 15%, and the second-half sequential GDP growth forecast raised to 2%.

Flood concludes with a quote from Benjamin Disraeli: "There is no education like adversity." His conclusion is clear-cut: be prepared for ongoing volatility.

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