Goldman Sachs flags extreme greed with 5 overheating metrics

Goldman Sachs partner Mark Wilson says markets are "all greed, no fear" with momentum exposure at a record high.

Goldman Sachs warned that extreme greed indicators, record momentum positioning and a concentrated AI narrative have pushed US equities into overheating territory. The warning comes as the market's dominant trade faces potential disruption from a geopolitical shift.

"People's minds are full of leverage, with no fear," Mark Wilson, a partner at Goldman Sachs, said in his weekly note. "I'm not the only one checking SK Hynix's stock price first thing every morning."

Wilson flagged five overheating signals. The options market's put/call ratio sits at historical extremes. Mega-cap tech stocks' five-day outperformance versus Goldman's unprofitable tech basket has reached or exceeded levels seen during the 2021 peak. Assets under management in single-stock levered ETFs — those offering two times or more exposure — have surged, concentrated in memory-chip names. Momentum strategy exposure on Goldman's prime brokerage book hit an all-time high. The S&P 500 has gained about 10% this year, while earnings-per-share expectations have risen roughly 15%, meaning the index's price-to-earnings multiple has actually contracted 4%.

The earnings picture provides some justification for the rally. First-quarter profit growth was strong, and expectations for the next two quarters are accelerating. US semiconductor producer prices, which had been in a deflationary trend since the mid-1990s, have turned positive over the past 12 months. Korean semiconductor export prices have posted what Wilson described as a "staggering" surge over the past nine months.

Yet the support is narrow. Excluding AI infrastructure and energy, S&P 500 EPS expectations have barely budged since the start of the year. The market is effectively betting on a single theme.

A Geopolitical Shift Looms

A credible Iran ceasefire framework has taken shape, covering a 60-day truce, strait reopening, mine clearance and a phased lifting of sanctions or embargoes. Wilson and Bloomberg macro strategist Michael Ball both said a deal would mark a genuine de-escalation.

For markets, the implications extend beyond geopolitics. The dominant positioning today is a barbell of AI compute stocks — whose capacity is constrained — paired with energy stocks that power them. An Iran deal that pushes oil prices lower would reduce inflation expectations, drag down bond yields and weaken the dollar, easing global financial conditions.

Ball said the biggest beneficiaries would be emerging markets, European equities, and a broader set of value and cyclical stocks. Europe, lacking energy independence, stands to gain the most from an end to the Iran conflict. The region's capex cycle is underappreciated, Ball said, citing German fiscal data as evidence.

On a technical level, US single-stock volatility is about 3.5 times the volatility of the index itself. In Europe, that ratio is roughly 1.5 times, making stock-specific opportunities there more attractive on a risk-adjusted basis.

The new Fed chair, Kevin Warsh, just completed his first week in office. Wilson noted that of the six Fed chairs since 1970, only two — Ben Bernanke and Janet Yellen — saw first-year drawdowns as mild as 10%. The other four experienced declines of 20% to 36%.

EPS growth momentum is expected to slow from the summer, while the front-loaded capex effect from the CHIPS Act is likely to fade after the same period, creating a potential earnings headwind in the second half.

This article is for informational purposes only and does not constitute investment advice.