U.S. equities could rally over the coming four weeks, Goldman Sachs strategists said Monday, citing positive technical equity dynamics and a tailwind from corporate buybacks.
“The pain trade for equities is higher and the bar for being bearish at the beach into a Labor Day barbecue party is high,” strategists said in a note to clients.
They note that the trend-following rule-based systematic funds have shifted from $450 billion long in July to $250 billion long currently and are in the process of re-leveraging. Moreover, Goldman also pointed out the potential for a 'green sweep' for commodity trading advisers (CTAs), which could result in significant buying activity in the stock market regardless of market direction.
The analysis predicts that in a stable or rising market, approximately $27 billion could flow into US stocks, while a declining market could still see about $22.9 billion in inflows.
In addition, the unwinding of put positions by target volatility and volatility control funds has been observed, as evidenced by the VIX index recording its largest 9-day volatility drop in history.
Traders are also positioned long gamma again. These factors are further supported by corporate demand, with an estimated $6.62 billion in daily purchasing power until the corporate blackout period ends on September 13, according to the note.
However, there is a cautionary note regarding the period after September 16, as historically, the second half of September has historically been the worst two-week trading period of the year.
Beyond this, strategists remain optimistic for the S&P 500, projecting it could reach 6,000, with November and December being key months driving the growth.
In a similar vein, recent economic data and earnings reports have reinforced JPMorgan Chase & Co.'s confidence in a continued rally for US stocks through the end of the year.
The Wall Street bank highlighted last week's events as reinforcing a bullish perspective, with signs of economic expansion, positive earnings growth, and expectations of a more accommodating Federal Reserve policy.
“While upside appears to be more muted than when we adopted this stance earlier this year, there remains material upside,” JPMorgan notes, emphasizing that the S&P 500 could set new records followed by a strong fourth-quarter performance.
JPMorgan's analysis points to an average 4.2% return for the US stock benchmark in the final quarter of the year, based on data from this century.
Potential risks to their bullish view include Japan's inflation data, geopolitical events affecting oil prices, the US election, changes in the Federal Reserve's commentary, and weak seasonality.