Goldman Sachs Warns Speculative Trading Spike Raises S&P 500 Downturn Risk

Goldman Sachs analysts have identified a sharp rise in speculative trading within the U.S. equity market, as reflected by their Speculative Trading Indicator reaching its highest level outside of major previous bubbles like the dot-com era and the COVID period. This surge includes increased trading volumes in unprofitable and richly valued stocks, along with heavily shorted names involved in meme-stock rallies, driven partly by retail investor enthusiasm and social media sentiment. While similar historical spikes have led to above-average returns in the short term (three to twelve months), they have also been followed by market downturns over a longer two-year horizon, indicating elevated risk. The current speculative frenzy has also triggered sharp short squeezes, pushing certain stock prices higher amid buying pressure from investors covering short positions. Despite these near-term gains, Goldman Sachs cautions that this speculative activity raises the likelihood of increased volatility and an eventual market pullback. The recent market highs, including record levels for the S&P 500 and Nasdaq, coincide with these warnings, suggesting that the rally may be vulnerable to a correction.