by Jan-Patrick Barnert
As stocks push toward all-time highs and a fear of missing out on the rally spreads among investors, a senior Goldman Sachs Group Inc. trader warned that there are valid reasons to meet the latest gains with caution.
This is especially true of lower-quality parts of the market, where stocks are being driven higher by short sellers forced to cover their positions, rather than by positive corporate fundamentals, Louis Miller, a managing director at Goldman, wrote in a note to clients on Tuesday.
“We flagged two weeks ago that the short squeeze the market was facing could provide an opportunity to press shorts lower, and we think that time is getting closer,” Miller wrote.
The lowest quality pockets of the market have lost their momentum from a performance standpoint, while positioning in these stocks is higher than many might think. Areas to watch are non-profitable tech, where in the past earnings moved lower as performance squeezed, “leaving room to the downside.” Baskets comprised of meme stocks are also “still at shortable levels,” Miller said.
The Nasdaq 100 climbed 1.5% to its first record since February and the S&P 500 rose 1.1% on Tuesday as investors drove stocks higher across the board. The gains were spurred by easing Middle East tensions, light positioning in equities overall and balanced comments from the Federal Reserve on the outlook for interest-rate cuts.
Despite the bullish tone, risks to the market persist from looming deadlines in trade talks, while the impact that tariffs could have on inflation, company profit margins and global growth remain unclear.
“The forward outlook for growth is negative starting in July,” said Miller. “Elevated inflation readings until the Fall could lead to slower growth, which could hurt the lowest-quality, most growth-sensitive areas of the market the most.”
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