Goldman Sachs Warns of High Risk of S&P 500 Overshooting in January

Scott Rubner, Managing Director for Global Markets at Goldman Sachs and a tactical market specialist, has flagged a significant risk of the S&P 500 overshooting during the latter half of January. Rubner's insights point to key market dynamics that could drive this phenomenon.

Volatility as the Driving Force

Rubner likened volatility to a quarterback in the financial markets, playing a pivotal role in influencing investment strategies. Lower implied volatility has prompted a wave of re-leveraging, pushing markets higher as investors capitalise on stable conditions.

Record-Breaking Inflows into U.S. Equities

Passive assets under management (AUM) have surged to $11.773 trillion, with U.S. equities seeing an unprecedented inflow of $186 billion over the past nine weeks. This marks the largest influx since February 2021, which saw $144 billion in inflows. Analysts attribute this momentum to the aftermath of the 2024 U.S. elections, which reignited investor confidence.

"Buy the Dip" Mentality Dominated 2024

Reflecting on market behaviour in 2024, Rubner noted the widespread "buy the dip" mentality, which fuelled significant capital deployment during market pullbacks. This investor strategy contributed to a resilient market performance throughout the year.

Liquidity Conditions Remain Strong

The market's liquidity conditions are robust, with top book liquidity at approximately $34 million as the quarterly roll period approaches. The money market segment has seen massive inflows, with a year-to-date increase of $992 billion, outpacing all other asset classes. With $9 trillion in money market AUM, even a minor reallocation of 1% could drive $90 billion into other asset categories, further amplifying market momentum.

Key Factors Supporting Market Growth

• The "Magnificent 7" stocks currently comprise 33% of the S&P 500's weight, underscoring their outsized influence on market performance.
• Historical data reveals that the second half of December marks the third-best two-week performance period since 1928, followed by the strongest two-week stretch in the first half of January.

The Overshooting Risk

Rubner emphasised that these conditions make the risk of an S&P 500 overshoot particularly high. As capital continues to flow into equities and historical patterns play out, investors should remain vigilant about potential volatility and market overextension.