Goldman Sachs analysts warn that surging investor confidence, reflected in their record “Risk Appetite Indicator” (RAI), could limit future returns for the stock market.
The RAI, which recently hit its highest level since 2021, suggests widespread optimism about economic growth and expectations of further policy support. However, Goldman Sachs points out that this momentum has stalled recently, with their “Risk Appetite Momentum” indicator showing a flat trend.
They explain that while credit markets remain the most bullish asset class, even “safe haven” assets like the Japanese yen and Swiss franc have weakened. Notably, the surge in gold prices, driven partly by central bank buying, has masked the overall risk appetite picture – excluding gold, the RAI would be significantly higher.
Despite the positive sentiment, the bank cautions that historically, similar RAI levels haven’t translated into strong future returns for the S&P 500. This coincides with ongoing declines in implied volatility across assets, particularly riskier ones, nearing historical lows.
Furthermore, the analysts highlight a concerning trend in options pricing. While equity put skew (indicating a low perceived risk of downside) remains low, VIX call skew (indicating a higher fear of volatility spikes) has risen to near record highs.
This suggests that the market, while comfortable with a potential rally, is increasingly worried about sudden volatility surges. This aligns with the recent rise in correlations between stock prices and volatility – a rally in volatility could amplify even during a rising market.
Finally, Goldman Sachs emphasizes that high market concentration, with a few large companies dominating indices, leaves the market vulnerable to “idiosyncratic events” – unforeseen company-specific issues that can cause significant market swings. Nvidia’s upcoming earnings report is an example of such an event that could trigger volatility spikes.
The investment bank suggests that record risk appetite might act as a “speed limit” for future stock market returns.
