Two weeks ago, Goldman’s David Kostin raised his price target for the S&P to 4,500 from 4,000 for 2023.

It was, you might suggest, a mark-to-market exercise. US equities were up 20% from the October lows, ostensibly laying claim to a new bull market thanks almost entirely to a monumental rally in the so-called “Magnificent 7” which comprise nearly 30% of index market cap between them.

Since then, buy-in for the rally has broadened, even as some on the sell-side are reluctant to jump on board and discretionary buy-side participation can be described in some instances as begrudging. Economists, meanwhile, still generally see a recession within the next 12 months.

“Some portfolio managers expect a recession to begin within the next year, a view that is consistent with most economic forecasters,” Goldman’s Cormac Conners wrote, in a note co-authored by Kostin. “In that scenario, current consensus expected 2024 EPS of $246 would likely be reduced by 9% to $223 and the index could fall by 23% to 3,400, representing a 15x P/E.”

Notwithstanding Goldman’s new house view (which, in addition to the 4,500 target for year-end, sees the benchmark rising to 4,700 within 12 months), the bank offered five reasons investors may consider hedging as summer begins.

One of those reasons is the rush into upside optionality — the clamor for “right-tail” — the grab for “crash-up” protection. “During the past three weeks, investors have crowded into calls and have reduced their hedges,” Conners wrote, flagging a dramatic shift in behavior starting in late May (so, in and around Nvidia’s “guide heard round the world), when investors “started paying higher prices for single stock calls.” Index call-buyers joined within days.

“We find these measures of put-call skew are contrarian indicators for forward market performance (particularly single stock skew), and they clearly show investors have bought upside asymmetry in stocks and indexes,” Goldman went on.

Last week, JPMorgan’s Nikolaos Panigirtzoglou pointed to small traders’ call option flows as an indicator that individual investors are excited about the rally. “This points to a re-emergence during May and June of the US retail impulse by the younger cohorts of retail investors that tend to prefer tech and tend to invest in the equity market via individual stocks or options on individual stocks,” Panigirtzoglou remarked.

A few days later, his colleague Peng Cheng said non-professional investors poured $1.5 billion into single stocks over the week ended June 20. That was a record, according to Cheng.

When you throw in ETFs, the buying spree came to $4.4 billion. Almost half of the single-stock buying was accounted for by Tesla, Apple and Nvidia. (Imagine that.)

At this point, it seems fairly clear that under-positioning among discretionary investors (professional or otherwise) has at the least been reduced and therefore doesn’t argue as strongly for an extension of the rally.

Consider, for example, that BofA clients bought stocks for a second week, to the tune of $4.5 billion in US equities.

“Inflows were the largest since October 2022 with both single stocks and ETFs seeing outsized inflows,” Jill Carey Hall wrote. “Hedge funds and institutional clients led the buying, with the third-largest inflows by hedge funds in our data history since 2008.”

A few days ago, I mentioned Goldman’s US equity sentiment indicator, which last week moved into “stretched” territory for the first time since the Fed began hiking rates last year. The figure below shows the indicator on a longer lookback.

“As 2023 has progressed, investors have increased their equity exposure. Hedge funds increased net leverage, mutual funds cut cash balances and foreign investors have been net buyers of equities,” the bank’s Conners wrote, adding that “at the latest reading, the SI registered a 114-week high of +1.2, suggesting that light positioning should no longer be a tailwind for the equity market.”

The bottom line for Goldman is that although recession odds are probably lower than consensus believes, and soft landing odds thereby higher, “investors [are] already bullishly positioned,” which means “it may be harder for the market to rally further from here.”

Earlier this week, I asked “Who’s buying the next round?” in the bull market. With systematics having re-allocated and re-leveraged, retail back in the game and professionals of various sorts now re-engaged, the answer is unclear.