Goldman Sachs sees exceptional market backdrop, echoes dot-com era signals

Goldman Sachs is flashing one of its hottest market readings in decades, and for desks that means the same trade that has been working can turn on a dime. The bank’s risk appetite indicator rose to 1.1 in the latest note, a level Goldman says has been above 1 only 2% of the time since 1950. At the same time, the S&P 500 and momentum stocks have pushed the momentum signal into rare territory, producing what Goldman called an exceptional backdrop.

The firm’s indicator, or RAI, tracks high-frequency data across fixed income, equity, liquidity, commodities and credit. Andrea Ferrario said 17 of the indicator’s 27 inputs were above 0.8 in z-score terms, while the RAI reading was also described as the highest since 2021 and in the 98th percentile since 1991. Goldman’s current read is the first time both risk appetite and equity momentum have been this elevated since the start of 2000, the period that now hangs over the comparison like a warning label.

The momentum leg of the signal has been powered by the iShares Edge MSCI USA Momentum Factor ETF, which is up 33% from its March 30 trough. Over the same stretch, the S&P 500 is up 18.25%, leaving Goldman’s momentum z-score above 3. That combination is exactly what gets portfolio managers and prop desks leaning in, but it is also where positioning gets crowded, correlations tighten and any stumble in leadership can spread quickly through books tied to the same factors.

Goldman is not treating the reading as a precise timing tool. Since 1962, the firm has found eight episodes in which RAI was above 0.9 and U.S. equity momentum z-scored above 2.0; three were followed by a bear market within two years. Goldman also noted that in 1999 and 2021, equity prices peaked almost 12 months after those elevated signals first appeared. In other words, the market can stay euphoric longer than skeptics expect, but the reversal can still be violent once breadth cracks and the trade unwinds.

That matters inside Goldman because the firm’s own broader stance is only modestly pro-risk, with an overweight in equities and selective hedges for downside and upside growth risks. Ben Snider has separately warned that U.S. equity breadth has narrowed to one of its weakest levels in recent decades outside the dot-com bubble, a setup that has historically pointed to drawdown risk over the next 6 to 12 months. If momentum rolls over, the first response is likely to be less about panic and more about cutting crowded exposure, leaning harder on hedges and rotating toward names with sturdier earnings support.