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Can US equities rally again?

Goldman SachsJohn Flood, Chris Hussey
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Market Structure and Technical Levels

  • The S&P 500's 200-day moving average (DMA) at 5760 is acting as a primary magnet for price action, with sellers emerging as the market trends toward the level.
  • John Flood characterizes the current state as "below the 200 DMA" but tentatively bullish, predicting the index will attempt to hold 5760 following the April 2nd event.
  • Market volume is currently depressed at 13 billion shares per day, significantly below year-to-date averages, with expectations for a rebound to 15–17 billion shares post-April 2nd.
  • Flood asserts that the most severe hedge fund performance destruction and de-risking events occurred on March 7th and 10th, noting these were multi-standard deviation moves unlikely to be repeated in the near term.

Investor Flows and Behavior

  • Retail Investors: The retail community is reported to be "fully reengaged" in the market.
  • CTAs (Commodity Trading Advisors): Currently short $25 billion in S&P 500 exposure; a market rise is expected to trigger momentum-driven buying as they cover shorts, creating a tailwind for equities.
  • Long-Only Asset Managers: Remained "frozen" ahead of April 2nd, acting as net sellers on the Goldman Sachs desk during recent volatility.
  • Hedge Funds: Most remain on the sidelines following recent de-risking, with only "clawbacks" of performance observed; they are waiting for April 2nd to serve as a clearing event for renewed participation.
  • Corporates: Previously aggressive buyers (purchasing over $1 trillion in stock last year) have reduced flow volume by approximately 30% due to the current buyback blackout period, which extends until April 24th.

Institutional Catalysts and Imbalances

  • Pension Rebalancing: Expected to generate a massive equity buy imbalance of approximately $25 billion versus $25 million in bond sales, driven by the need to restore equity/fixed income mix following market pressure.
    • This imbalance is described by historical standards as one of the largest seen, potentially impacting markets immediately through April.
  • April 2nd ("Liberation Day"): Viewed as a critical clearing event that could unlock trading activity from major asset managers and hedge funds.
    • Flood anticipates the event will be "noisier and more complicated" than typical, potentially setting the tone for the subsequent weeks.
  • Upcoming Economic Data: Next week is identified as one of the year's busiest, featuring:
    • Sunday: China economic data.
    • Tuesday: Manufacturing ISM.
    • Wednesday: Tariff announcements.
    • Thursday: Services ISM.
    • Friday: Jobs report.

Sector Trends and Regional Exposure

  • Europe and China: Flood expresses discomfort with the rapid recent addition of exposure to these regions; warns that European equities may face "Last In, First Out" (LIFO) selling pressure if U.S. markets weaken further.
  • Consumer Staples: Identified as the current "favorite trade" for shorting; Flood cites an overhang from GLP-1 drug discussions ("Make America Healthy Again") and suggests recent rallies were driven by short covering rather than fundamental bullishness from long-term investors.
  • Recent De-risking: The March 7th/10th sell-off primarily targeted recently accumulated U.S. positions in financials and industrials, consistent with a LIFO phenomenon within the U.S. equity market.

Forward-Looking Sentiment

  • Flood remains optimistic that risk is skewed to the upside, contingent on the April 2nd event allowing the largest investors to begin active trading (both offensive and defensive).
  • The highest velocity de-risking is considered "behind us," though uncertainty regarding administration policy and headline risks remains elevated.