The S&P 500 will add to its rally this month, spurred higher by improving liquidity, collapsing volatility, fading recession fears and seasonal factors, and then start to fade, according to flow specialists at Goldman Sachs Group Inc.
“We think this rally will continue for the next couple weeks but lose steam into August,” they wrote in a note to clients on Monday.
Historical precedent suggests the S&P 500 can continue its 25% rally from April lows. The last time the benchmark index lost ground during the month of July was 2014.
“We are entering the strongest month for the S&P historically July brings an average return of 1.67% looking back to 1928,” said the Goldman flow specialists, noting that the first two weeks of the month are traditionally the best span of the year for stocks.
Goldman sees reasons beyond seasonality for the rally to continue. A decline in volatility is aiding flows and sentiment, and systematic investors, who apply a set of fixed rules when picking stocks, have plenty of capital to deploy.
There could be roughly $80 billion in global equity demand over the next month, according to the flow specialists.
Liquidity has meanwhile improved. “In the recent rally, the ability to transfer risk quickly lends itself to healthier trading,” the Goldman team wrote.
There has also been a mood shift on Wall Street. Tensions in the Middle East have cooled, and the Trump administration appears to be making progress on dozens of trade deals. Investors are turning their attention to potential interest-rate cuts and discounting the risks of recession.
Some risks to the rally remain as market breath is narrow, low-quality areas have outperformed and positioning saw a notable increase in bullish flows. Several high profile economic data releases loom, starting with US jobs data this week.
“The rally has resulted in increased profits on long positions. Both Nasdaq and Russell 2000 are the standouts. Average position profits here are near 5%, raising near-term profit taking risks, which could hamper further upside,” Citigroup Inc. strategists wrote in a note to clients.
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