Goldman Predicts $29B Stock Buys, Tech Leads Rally

Key Takeaway

• Goldman Sachs predicts momentum traders will buy $29 billion in global stock futures, including $8.5 billion in S&P 500 contracts, supporting a market bounce.
• CTAs are positioned to purchase equities in any market scenario over the next week, despite April's volatility and concerns over prolonged high US interest rates.
• The MSCI All-Country World Index's recent recovery is deemed fragile by Citigroup, highlighting the need for new bullish inflows for sustained rally.

Momentum Traders Back Equities

Goldman Sachs Group Inc. has forecasted that momentum traders, specifically Commodity Trading Advisers (CTAs), are set to buy equities over the next week, irrespective of market direction. This comes after a volatile April for global equities, largely due to concerns over the US Federal Reserve's interest rate policies and sticky inflation. CTAs, who manage approximately $106 billion in long positions, are expected to inject about $29 billion into global stock futures, including $8.5 billion into S&P 500 contracts, if the market rallies. Even if stocks were to decline, purchases of up to $1.5 billion are anticipated. This buying spree is poised to support a rebound in global equities following a challenging month.

Interest Rates and Market Dynamics

The backdrop to this expected equity buying is a complex interplay of interest rates and market sentiment. The Federal Reserve's upcoming policy meeting is highly anticipated for clues on future rate movements. April saw global equities, as measured by the MSCI All-Country World Index, dip by about 2% amidst these uncertainties. Citigroup Inc. strategists have pointed out that the recent market rebound is fragile, driven more by profit booking on short positions rather than new bullish inflows. For a sustained rally, they argue, fresh bullish investments are necessary.

Hedge Funds and Tech Sector Rally

Amidst broader market challenges, hedge funds have ramped up their investments in technology stocks, marking the largest net buying activity since December 2022. This surge was led by significant interest in semiconductors and related equipment, with hedge funds' allocation in this sub-sector reaching a five-year high. Notable earnings from Alphabet Inc. and Microsoft Corp. have fueled optimism, propelling the S&P 500 Information Technology Index to a 5.1% gain last week. This move by hedge funds indicates a strategic bet on the long-term potential of the technology sector, despite recent volatility and high valuations.

Goldman's Strategy Amid Rate Hikes

In light of the higher-for-longer interest rate environment, Goldman Sachs has advised investors to focus on 'stable growers' - companies with consistent earnings growth. This strategy is aimed at navigating the anticipated slow economic growth and persistent inflation. Among the recommended stocks are consumer staples like PepsiCo and Colgate-Palmolive, as well as industrials and consumer discretionary firms such as Waste Management and Domino’s Pizza. This approach reflects a shift in market expectations, from anticipating multiple rate cuts to now foreseeing possibly just one, as inflation remains a concern.

Street Views

• Cullen Morgan, Goldman Sachs Group Inc. (Bullish on global equities and the S&P 500):

  "We now have CTAs as buyers of global equities and the S&P 500 in every scenario over the next week." "Morgan expects CTAs to buy about $29 billion in global stock futures — including $8.5 billion in S&P 500 contracts — if equities were to rally over the next week. CTAs would still buy as much as $1.5 billion if stocks sold off again."

• Chris Montagu, Citigroup Inc. (Neutral on market rebound sustainability):

  "The bounce cannot continue on de-risking flows alone and must be supported by new bullish inflows for the rally to continue."