"High volatility and low liquidity" negative feedback, recession risks underestimated, Goldman Sachs remains bearish on US stocks in the short term

On the 11th, Goldman Sachs released an in-depth research report on the U.S. stock market. Analysts believe that the current market is in a dangerous cycle of poor liquidity and high volatility, with policy uncertainty and economic outlook concerns making the market extremely sensitive to news flow.

Goldman Sachs' analysis shows that the current weekly volatility of the S&P 500 index has risen to its highest level since the pandemic, while market liquidity has sharply declined over the past month, approaching dangerous territory.

Although light positions provide potential upside space in the event of improved policy and economic outlook, the market may be overly optimistic and overlook the possibility of an economic recession.

Goldman Sachs maintains a three-month target price of 5,300 points for the S&P 500 index but believes that short-term risks are skewed to the downside, advising investors to remain vigilant in this high-volatility, low-liquidity environment.

Market Volatility and Deteriorating Liquidity: A Worsening Negative Feedback Loop

Goldman Sachs stated that the current weekly volatility of the S&P 500 index has reached its highest level since the COVID-19 pandemic, with the VIX index soaring to 52 earlier this week, and the S&P 500 index experiencing the largest two intraday trading ranges since the global financial crisis.

On April 5, the S&P 500 index fell by 6%, reflecting market concerns over the tariff announcement on April 2; while on Wednesday of this week, the index rebounded by 10%, marking the third-best single-day performance since 1950.

Meanwhile, Goldman Sachs' S&P 500 liquidity tracker shows that market liquidity has sharply declined over the past month, although still above the lows of 2020, it is nearing dangerous territory.

Specifically, on April 7, the bid-ask spread for median stocks in the S&P 500 index surged to 22 basis points, although still above the levels during the pandemic lows in 2020.

This high volatility and deterioration of market liquidity form a negative feedback loop. In the absence of liquidity, the distribution of market returns will widen, leading to greater price fluctuations.

Economic Recession Risks Underestimated, Market Optimism Diverges from Reality

The report emphasizes that although the market has light positioning in anticipation of improved policy and economic outlook, which may bring upside potential, it has not fully reflected the high risk of an economic recession.

Goldman Sachs' investor sentiment indicator rose from -2.5 to -1.7 this week, primarily due to massive inflows into U.S. ETFs. Based on Goldman Sachs' analysis, the current market is near the three-month target price of 5,300 points for the S&P index, but short-term risks are skewed to the downside.

However, the forward price-to-earnings (P/E) ratio of the S&P 500 index is currently at 19 times, in the 75th percentile of the past 30 years, far above the levels during major market downturns in recent years. This indicates that the market may be overly optimistic and overlook the possibility of an economic recession.

Goldman Sachs' report also provides a detailed analysis of the performance of different sectors and industries. For example, the information technology sector has a weight of 30% and performed the best over the past week, while the energy sector performed the worst. Specifically, the information technology sector rose by 0.2% over the past week, while the energy sector fell by 11.3%