How to view the significant rebound in the US stock market? Goldman Sachs: Bear Market has long bullish days, currently the valuation has limited upward space.

Goldman Sachs stated that the biggest driver in the current market remains uncertainty, and investors are not yet truly bullish or bearish on the market.

Written by: Li Xiaoyin

Source: The Wall Street Journal

Goldman Sachs warns that bear market rallies are the norm, with uncertainty dominating market movements.

Over the past two weeks, the US stock market has rebounded significantly, completely recovering all losses since April 2. Goldman Sachs analyst Peter Oppenheimer recently stated in his research report that the recent sharp rebound in the stock market may just be a typical bear market rally, and the current market environment presents a dilemma for stock investors.

Oppenheimer believes that the biggest driving force in the current market is still uncertainty, and investors have not yet truly become bullish or bearish on the market:

“The asymmetry of stock investment is poor. Sharp rebounds in bear markets are the norm, not the exception.”

“If the U.S. tariff policy is rapidly revoked with almost no lasting economic damage, it indeed suggests that the downside risk is limited. However, given the current valuation levels, the upside potential is also limited.”

This market environment makes investing extremely difficult, with decisions clouded by ambiguous headlines. Market participants must choose between chasing a weakening rebound and then risking a late exit, or completely missing another round of a squeeze rise.

The tricky market environment forces investors to “buy with a pinch of salt”

Many investors were forced to sell risk assets in early April when the tariff outlook was unclear, but now they are buying in during the rebound, while few investors have enough exposure to fully benefit from this performance.

Nomura’s cross-asset strategist Charlie McElligott described the current situation as “It’s a disgusting stock trade, and it’s a scenario nobody wants.”

In a report, McElligott confirmed that the phenomenon of “being forced to buy back positions while pinching their noses” is happening in index options, “despite the fact that most investors dislike the future macro growth outlook.”

Historical data shows that the rebound may be nearing its limit

From the data, as one of the most intense monthly rebounds historically in April, this rebound may have exhausted its upward potential.

According to media statistics, since 1980, the global stock market has experienced several bear market rallies that lasted an average of 44 days, with a rise of 14%. Although this year’s global stock market decline cannot officially be termed a bear market, prices have increased by 18% from the intraday low on April 7.

Academy Securities macro strategist Peter Tchir stated:

“Interest rates and risk assets will continue to be driven by news headlines. Policy and trading will take turns driving the market.”

Investor sentiment and positioning have become crowded

Goldman Sachs Managing Director John Marshall wrote in another report that the financing spread—measuring the demand for long exposure through equity derivatives such as swaps, options, and futures—has decoupled from the recent rise in the stock market. “This indicates that macro investors have reduced their equity exposure as the market has strengthened recently.”

He Marshall expects that this week will be particularly volatile, as the Federal Reserve meeting will be held this week, at which “comments on June/July will be especially important.”

Systematic investors’ buying is steadily increasing, providing support for the rebound. Goldman Sachs traders noted that the buying by systematic macro investors climbed to $51 billion last week, and is expected to purchase $57 billion this week.

“The overall purchase scale is not insignificant, but it is not larger either, because if the signal flips quickly, it will reduce the immediate velocity of capital flow, and the volatility environment is higher than before.”

Other buying flows that provide support during the rebound appear to be more tense. JPMorgan’s tactical positioning monitor is currently in a neutral state, with weekly changes indicating that “positions have moderately increased.”

The leverage ratio of hedge funds has rebounded month on month and is currently at the long-term 96th percentile. Meanwhile, retail investors continue to increase their risk exposure.

John Schlegel, head of the intelligence team at JPMorgan, stated:

Since 2017, retail investors have seen the strongest buying month in our data, purchasing both individual stocks and ETFs.