Goldman Sachs: Equity Deleveraging May Be in the Late Stages, Volatility Risks Still Elevated

Goldman Sachs' trading desk said July 30 that U.S. equities have seen abrupt momentum reversals and position unwinds recently, a pattern consistent with deleveraging moving into its later stages. The team cautioned that risk reduction is still incomplete, with global aggregate leverage sitting in the 93rd percentile of the past five years. Geopolitical developments, Federal Reserve policy signals and the earnings season backdrop are likely to keep volatility high. Looking to August, Goldman expects U.S. equity upside to be capped by seasonal fund outflows, muted institutional demand and dealers' positive gamma positioning, leaving the market prone to a near-term rangebound trade. The bank also warned that further declines could trigger additional selling from systematic strategies such as CTAs. Under a downside scenario, estimated selling over the coming week could reach $24.9 billion, compared with roughly $2.3 billion of buying in an upside scenario. Goldman sees corporate buybacks as the most reliable source of near-term demand. About 31% of S&P 500 companies are currently in open repurchase windows, a share expected to climb above 90% by mid-August. At the same time, rising correlations between individual stocks and the broader indices are increasing the risk of synchronized drawdowns. Goldman recommends adding protection proactively, including long correlation exposure, three-month put options on the Russell 2000 ETF, and short-dated option hedges on retail-favorite names. The bank said hedging costs remain reasonable for guarding against additional downside.