Market analysts are expressing growing concern over the potential for a significant downturn in U.S. stocks, particularly within the troubled software and tech sectors. Recent weeks have been marked by chaotic movement in these markets, and forecasters warn that the risk of another sharp pullback has noticeably increased.
According to analysts at Goldman Sachs, the likelihood of a market drawdown has escalated from 23% to 28%. This increase is attributed to recent volatility and a slowdown in the momentum of U.S. equities. They highlighted a concerning decline in equity momentum, which reflects how rapidly stock prices are increasing or decreasing. While the S&P 500 has shown gains over the past six months, its momentum has dipped by approximately 4.3%. Historically, such a drop has been a precursor to larger market corrections. In their analysis of stock behavior since 1950, Goldman Sachs revealed that when the S&P 500’s momentum fell beyond the 4.3% threshold, the index typically experienced an average decline of 10% in the ensuing year.
Analysts noted that the current market conditions are dangerously close to this pivotal level. Similarly, technical analysts at Piper Sandler have sounded the alarm, indicating that their short-term momentum indicators suggest a fatigued market, poised for a pullback despite ongoing upward trends. They advise investors to exercise caution, particularly regarding chasing after market breakouts, and to wait for confirmed support before increasing their positions.
Adding to the unease, Torsten Slok, the chief economist at Apollo, observed that a growing number of companies within the S&P 500 are starting to trade based on individual company fundamentals rather than moving in unison with the overall index. This divergence is coupled with increasing volatility, as more stocks are experiencing daily movements exceeding 10%.
Furthermore, Slok pointed out that options trading activity in the S&P 500 is at alarmingly high levels, indicating a surge in retail speculation and leverage-like exposure among investors. He emphasized that this trend, marked by significant idiosyncratic price movements and robust options participation, could render the market structure more delicate and susceptible to abrupt and pronounced shifts.
With these indicators combining to paint a worrying picture, investors are being urged to remain vigilant amid the uncertainty enveloping the tech sector and the broader equities market.
