Goldman Sachs: Macro product short positions reach their highest level since the end of 2022; positive news may trigger a rapid rebound in the US stock market

Goldman Sachs’ trading desk said that the current positioning structure of hedge funds in the U.S. stock market may create conditions for a strong rebound in U.S. stocks after recent consolidation.

Data show that while maintaining long positions in individual stocks, speculative capital has built a large amount of short hedges through exchange-traded funds (ETFs) and stock index futures and other macro products. This short hedge size has now risen to the highest level since September 2022.

Goldman Sachs’ chief brokerage business team data show that hedge funds as a whole still maintain a bullish stance on individual stocks, but have continued to increase their hedging effort at the macro level. John Flood, head of Americas equity execution services and a partner at Goldman Sachs, said that this “long stocks, short indexes” structure reflects the market’s response to multiple uncertainties, including the conflict in the Middle East, concerns in the credit markets, and doubts around the investment cycle for artificial intelligence.

However, this structure also means that if good news emerges for the market, investors may be forced to rapidly cover the short hedges they had established, driving a quick rise in the index. In an interview, Flood said that if there is major news announcing that the conflict has ended, there could be a noticeable rebound at the index level. “The market could rise 2% to 3% in a short time, and a large portion of the gains would come from short covering in macro products.”

Data show that hedge funds’ total exposure is now about 307%, approaching historical highs. This metric measures the total value of long and short positions. Flood noted that in the current environment, the “right-tail risk” of an upside breakout is higher than the risk of downside. “Because the overall position size is large, and the short position in macro products has increased significantly, if good news emerges, it could trigger an aggressive covering rally.”

Late Monday, the market briefly displayed a similar pattern. After U.S. President Donald Trump said that a war with Iran could be “resolved very soon,” the S&P 500 index ultimately closed up 0.8% after falling as much as 1.5% intraday. Traders broadly believe that this reversal was partly driven by investors covering short positions they had built earlier. Even so, the S&P 500 index is still about 3% below its historical high, while many individual stocks have fallen more sharply.

A turbulent market environment has already hit some investors. Goldman Sachs data show that due to rapid rotation among industry sectors, fundamental long/short hedge funds saw a pullback in returns of about 4% over the past year.

Meanwhile, other types of institutional investors are still waiting on the sidelines. Flood said that long-term capital, including traditional asset management firms and sovereign wealth funds, is currently in a phase of waiting for clearer signals.

“Since the beginning of this year, long-term investors’ performance has been good, until the conflict in the Middle East broke out,” Flood said. “With rising macro uncertainty and increased market volatility, many institutions are choosing to temporarily stand aside.”

Corporate buybacks provide some support to the market. Goldman Sachs’ corporate buyback trading desk said that last week’s level of activity in corporate stock buybacks reached one of the highest levels in three years. Many companies used the recent pullback in share prices to increase their buyback力度.

Retail investors are still an important source of demand in the stock market, but if the jobs market clearly weakens, this portion of funds may enter the market less. Flood said that if multiple rounds of negative employment data emerge in the future, the market may worry that retail money will withdraw and cause stocks to fall. However, he believes that a single weak employment report is not enough to change the current market setup.

Looking ahead over the next few weeks, Goldman Sachs expects market volatility could further increase. Even though this year’s average daily trading volume has already exceeded 20 billion shares, the depth of market liquidity has declined noticeably. Goldman estimates that the size of S&P 500 futures that is tradable at the best bid/ask prices is about $4 million, far below the historical average of about $14 million. Typically, when this indicator falls below $7 million, it means that market liquidity stress is starting to rise.

Flood said this means that when large institutions execute big trades, their impact on prices will be significantly amplified.

As for the market’s ultimate direction, it largely still depends on how geopolitical developments unfold. Flood said that investors currently generally expect the conflict in the Middle East to show easing signals within the next two weeks. If the conflict lasts longer and there is no positive progress, equity indexes could face fresh pressure.