Real interest rates are rising rapidly, and Goldman Sachs warns that "systemic selling pressure" is building in US stocks at the end of the quarter.

Goldman Sachs warns that rising real interest rates are squeezing risk appetite, and month-end and quarter-end pension rebalancing and CTA selling could put additional supply pressure on the US stock market.

On September 29, Rich Privorotsky, head of Goldman Sachs' equity business, said that although the stock market had previously shown resilience, "the pace of interest rate increases, especially the pace of real interest rate increases, has become so severe that the market cannot ignore it."

He emphasized that for stocks, the key factor is not just the absolute level of interest rates, but also the speed at which they rise. Data shows that when interest rates rise rapidly by about two standard deviations, the stock market tends to react more significantly.

Currently, the two-standard-deviation line has been breached.

Privorostsky stated that real interest rates have fluctuated at one-month levels, reaching one of the most dramatic levels since 2013. He added, "Higher interest rate volatility reduces Wall Street's willingness and ability to intermediate risk." This means that the market's capacity to absorb risky asset transactions may decline during periods of heightened interest rate volatility.

From within the stock market, the pressure is uneven. Privorostsky says the "pain" is already visible beneath the surface of the index: small-cap stocks, financial stocks, and other sectors with longer durations and higher interest rate sensitivity are experiencing significantly more pressure than large-cap technology stocks.

End-of-quarter rebalancing could bring $33 billion in selling pressure.

Privorostsky estimates that pension funds may sell a total of approximately $33 billion in stocks during month-end and quarter-end rebalancing. Of this, monthly rebalancing corresponds to approximately $11 billion in sales, and quarterly rebalancing corresponds to approximately $22 billion in sales.

Goldman Sachs stated that the estimated $33 billion in sales would place it at the 97th percentile of all buy and sell forecasts over the past three years; and at the 98th percentile if the observation period is extended to January 2000. Goldman Sachs also expects pension funds to purchase a corresponding amount of bonds.

Privorostsky stated that quarter-end and month-end cash flows could support duration assets, therefore he is "tactically inclined" to pursue this direction strategically.

In addition to pension rebalancing, systemic funds may also bring additional selling pressure.

According to Goldman Sachs' CTA model, in a sideways market scenario, systematic management institutions such as CTAs may sell approximately $5.3 billion worth of Russell 2000 index futures in the coming week. Privorostsky calls this "one of the largest sell estimates in the past six years."

Regarding the credit market, Privorostsky stated that the credit market is beginning to show signs of stress, a risk that stock volatility had not previously fully reflected.

Regarding the future market path, he believes that energy and interest rate trends will remain key. He stated, "I can be extremely optimistic about artificial intelligence and its pace of progress, but at this stage, unless the energy and interest rate issues are resolved, they are almost irrelevant."

He further stated that a decline in oil prices could help alleviate interest rate pressures; stable interest rates could create conditions for a broader stock market rebound. Conversely, end-of-quarter pension rebalancing and CTA selling of Russell 2000 futures could become liquidity factors that the market needs to digest.

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