Goldman Sachs warns of $249 billion downside asymmetry in August

The S&P 500 faces a deeply asymmetric risk profile in August, with Goldman Sachs estimating $249 billion of potential systematic selling on further declines versus $23 billion of buying on rallies.

"The market is still walking through the ruins of a significant momentum and positioning unwind," Gail Hafif, Brian Garrett and Lee Coppersmith of Goldman Sachs' prime brokerage and flow team wrote in a July 29 note. "Before any meaningful re-risking, we need to navigate the debris of the past several weeks."

Global gross leverage across Goldman's prime book sits at the 93rd percentile on a five-year basis and the 65th percentile on a one-year basis, indicating that despite recent de-grossing, institutional positioning remains crowded. Information technology saw its largest single-day long liquidation since September 2024 last week, registering a Z-score of minus 3.6. Systematic strategies currently hold about $196.3 billion in US equity long positions, at the 48th percentile on a three-year lookback, while CTA positioning sits at the 44th percentile. Goldman's quant models show that if the S&P 500 — which has already breached the firm's short-term trigger level of 7,453 — continues to slide, the resulting sell program would be more than 10 times larger than the buy program in an upside scenario.

The warning comes as the S&P 500 fell 1.5% on July 29, the Nasdaq 100 entered a technical correction down 11% from its record, and the 30-year Treasury yield surged to 5.21%, the highest since 2007. With the Federal Reserve holding rates at 3.5% to 3.75% in a 9-3 vote that included three dissents favoring a hike, and Brent crude jumping 6% to $88 a barrel on renewed US-Iran hostilities, the cross-currents are compressing the window for risk-taking. Goldman's team recommended three specific hedges: a reverse dispersion trade betting on rising correlation, three-month put options on the Russell 2000, and short-dated option protection on the GSXURFAV retail-favorite stock basket.

Fund Flows Signal a Buyer Strike

Passive equity funds have absorbed a record $742 billion year-to-date, while active funds have shed $83 billion, according to Goldman's flow data. July alone saw $34 billion pour into US equity funds, the third-largest July inflow in more than two decades. But the team expects that momentum to cool sharply in August, which historically ranks alongside May as one of the worst months for equity fund flows. "Rising geopolitical concerns, energy price pressure and monetary policy uncertainty are setting the stage for a temporary buyer strike in August," the note said.

Mutual funds tend to hold elevated cash ahead of midterm elections and deploy only after results are known, while foreign investors typically trim US equity exposure in the month before voting. The Goldman portfolio strategy team noted that US stocks historically trade sideways before midterms and rally into year-end, with volatility beginning a gradual climb in late summer and accelerating sharply in the month before Election Day.

Buybacks Offer the Most Reliable Support

One structural tailwind stands out: corporate share repurchases. About 31% of S&P 500 constituents by count are currently in an open buyback window, a figure the firm expects to rise to roughly 53% by next week and above 90% by mid-August as companies emerge from earnings blackout periods. Goldman described buyback demand as "the most supportive and reliable flow for US equities in August," providing a steady bid as the market digests the aftereffects of the deleveraging.

Corr1 Risk Is Rising

The report flagged a growing risk of a correlation-1 event — a scenario in which individual stocks and the index decline in near-unison, rendering single-stock diversification useless. The one-month implied correlation for the S&P 500 has ticked higher during the recent selloff, and the historically wide spread between single-stock volatility and index volatility is narrowing as single-stock vol retreats from elevated levels. "With macro uncertainty persisting and the market purging momentum enthusiasm, the probability of a Corr1 event is rising and has entered the radar of market participants," the team wrote.

This article is for informational purposes only and does not constitute investment advice.