2 big warning signs a correction in stocks may be looming, according to Goldman Sachs

Business Insider

3 days ago

Investor exuberance is high, but there's a pair of risks that could derail the latest rally to record highs.
Alexnadria Wilson-Elizondo, the co-CIO of multi-asset solutions at Goldman Sachs, said the bank was expecting the market to soon run into a correction. There are two warning signs that the market is flashing, she said, speaking to CNBC about her outlook on Tuesday.
"A little bit of a correction," Wilson-Elizondo said of the short-term. "And it would be an opportunity for us to continue to add back into the portfolios."
Here are the two warning signs she sees:
1. High risk-appetite
Market sentiment has improved dramatically since President Donald Trump first unveiled his tariffs in April — but there are signs that investors are growing overly optimistic, Wilson-Elizondo said.
According to a survey conducted by Bank of America, global fund managers' sentiment reading in July rose from 3.3 to 4.3. Investors are now the most positive about the market since February, when they were still feeling upbeat in the early days of Trump's second term.
Investors have also largely brushed off the risk of a recession. Fifty-nine percent of fund managers said they believed a global recession was unlikely, the most optimistic investors have felt about growth in about five months, the BofA survey found.
"When you look at fund manager surveys or risk appetite and sentiment, things have shot up to record-highs in three months. So really quickly, tactically people have re-invested," Wilson-Elizondo said.
2. Retail's stock buying boom
Retail investors have been ultra-bullish on stocks, aggressively buying the post-Liberation Day dip in equities.
Wilson-Elizondo said retail investors purchased around $50 billion worth of stocks over the last month, in-line with estimates from Barclays released on Tuesday.
In a note earlier this month, JPMorgan estimated that retail investors purchased a net $270 billion worth of stocks over the first six months of the year, and were on track to buy a net $360 billion in the second half.
"It's coming in at much higher levels than it has in the past," Goldman's Wilson-Elizondo said of retail activity. "And in our minds, that's very vulnerable to changes in the labor market."
The job market has remained resilient, but there are signs that hiring is beginning to slow, Goldman strategists wrote on Tuesday. The bank pointed to the slowdown in private job gains and said the job market risked hitting "stall speed" if the economy continued to slow — a situation where jobs growth is so week, it creates a "self-reinforcing rise in unemployment," they added.
"There's a very high correlation between the labor market and the willingness to be invested in risky assets," Wilson-Elizondo added.
Still, Wilson-Elizondo said she remains bullish on the outlook for stocks over the long term. She pointed to a cocktail of bullish factors that could help stock prices tread higher past 2025:
Monetary policy. The Fed is expected to cut interest rates down the line, which should loosen financial conditions and offer a boost to risk assets. Investors are pricing in a 93% chance the Fed will cut rates anywhere from one to three times by the end of 2025, according to the CME FedWatch tool.
Trump's tax bill. The GOP tax and spending bill, which includes some stimulus measures and offers tax breaks to key businesses, is also expected to help juice the market, Wilson-Elizondo said.
Talk of a pullback has been swirling on Wall Street since major indexes climbed back to record highs. Evercore ISI, Stifel, Pimco, and HSBC are among the firms that have recently flagged the risk of a stock correction.