Last Friday, as the S&amp;P 500 just hit a record high, the Goldman Sachs trading desk issued a warning—this rally has pushed the market to the tipping point for a pullback.
John Flood, Head of Goldman Sachs US Trading, wrote in his weekend client report that the market &#34;is starting to feel a bit overdone.&#34; When clients asked why the market continued to rise, Flood's core assessment was: total leverage remains too high, while net leverage is too low—&#34;This is the perfect storm of right-tail risks we warned about at the lows in late March, which have been playing out gradually over the past two weeks, with the fastest pace last Friday.&#34;
He further stated: &#34;The market is now fully prepared for a pullback next week (i.e., this week).&#34;
Meanwhile, geopolitical tensions took a sharp turn over the weekend. The Strait of Hormuz closed again. In Monday's Asian session, Brent crude surged up to 7.9% to $97.50 per barrel, while WTI rose more than 7% to around $90 per barrel. S&amp;P 500 futures fell 0.7%, and Nasdaq 100 futures dropped about 0.9%—the gains from last week faced direct pressure to be given back.
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<h2>Leverage Structure Imbalance, Technical Tailwinds Fading</h2>
Flood's core warning logic lies in the current leverage structure of the US market.
According to Goldman Sachs PB data, the overall account gross leverage ratio is currently 310%, sitting at the 92nd percentile for one year and the 98th percentile for five years—meaning that for 98% of the time in the past five years, market leverage was lower than current levels.
At the same time, the net leverage ratio is only 75%, at the 21st percentile for one year. High total leverage combined with low net leverage implies crowded market positioning but uncertain directional bets—if sentiment reverses, the pressure of deleveraging will be released all at once.
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Flood pointed out that from a purely technical perspective, this rally could still continue for some time—provided the net leverage ratio rises above the 50th percentile for both one-year and five-year averages. However, there is still a significant gap to this threshold.
Another force driving this rally—CTA strategy funds—is also nearing its end. According to Flood, CTAs bought $33 billion in S&amp;P 500 this week, with an expected additional purchase of $23 billion next week. But he clearly warned: &#34;The peak velocity demand from this group has already passed.&#34;
Brian Garrett, a colleague at the Goldman Sachs trading desk, confirmed this judgment in his Sunday evening report: &#34;Both macro short covering and CTA systematic demand, these two technical tailwinds, are ending. Over the next two weeks, earnings season will become the true test.&#34;
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<h2>Behind the Rally Led by Giants: Driven by Short Covering, Not Fundamentals</h2>
During this rebound, tech giants and the &#34;Magnificent Seven&#34; performed exceptionally well. Garrett explained the underlying mechanism:
&#34;For every $1 of SPY/E-mini shorts covered, an average of 37 cents worth of 'leader' stocks were bought net.&#34;
Over the past three weeks, large-cap stocks achieved excess returns of 1,330 basis points relative to the equal-weighted S&amp;P 500, one of the widest spreads in history.
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At the same time, call option volume for large-cap stocks is rising sharply.
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Flood noted that based on client conversations, the market still holds genuine conviction in the next leg of AI growth, with focus concentrated on energy, industrial, and hardware suppliers (LNG, ET, LGN, AMAT, MRVL, etc.). Non-AI long interest is primarily focused on the healthcare sector. Additionally, hedge funds are shifting from covering macro shorts to gradually buying individual stock longs.
<h2>Earnings Season: The Next Key Variable</h2>
Another factor supporting longs is the start of earnings season. Flood pointed out that Q1 earnings opened robustly, and next week companies representing 24% of S&amp;P 500 market cap will report results, providing more directional signals to the market.
Additionally, ETF trading volume has fallen to 30% of total turnover, aligning with historical averages—this proportion briefly exceeded 40% in March. S&amp;P 500 order book depth has also recovered significantly from last month's low of $2 million to $9 million, showing marked improvement in liquidity.
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However, Garrett's overall assessment of the current market environment remains quite cautious: &#34;This feels like déjà vu from April 2025 (after reciprocal tariffs)... It remains a very difficult trend to navigate.&#34;
<h2>Five Trading Directions from the Goldman Sachs Trading Desk</h2>
While issuing the pullback warning, Flood and Garrett also outlined five trading directions for the current environment:
1. Long Emerging Market Equities Flood cited a comment from colleague Tony Pasquariello regarding the Korean market: &#34;If I told you you could buy a market where consensus expects earnings growth exceeding 200%, yet the forward P/E is only 7x, what would you think?&#34; For US-listed tools, EWY is the top choice. Additionally, KWEB call option volume reached 400,000 contracts on Friday.
2. Trade Tail Risks Using Volatility Repricing The Goldman Sachs trading desk executed S&amp;P 500 lookback put options this week—the cost for a 3-month, 95% lookback option is currently below pre-conflict levels, only slightly above the five-year average.
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3. Upward Volatility Is Cheap Enough to Express Directional Views Bears can sell heavy delta positions; bulls can directly hold right-tail options. Goldman Sachs models show that if the market rises another 2%-3% from current levels, market makers will face significant short S&amp;P 500 gamma exposure, potentially triggering a chain reaction of &#34;spot price up, volatility up + gamma chasing up.&#34;
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4. Buy Call Options on Potential Short Squeeze Candidates The cost for 3-month, 10% weighted average call options on Goldman Sachs' flagship index GSXUMSAL is approximately 85 volatility points, while a basket of options costs 25-30 volatility points less.
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5. Long Fertilizer-Related Trades The Middle East conflict will have a ripple effect on the food complex lasting over six months—disrupted fertilizer supply chains mean soft commodity costs will rise next year. Goldman Sachs is pricing call options on the BCOMGR index, with implied volatility around 22. Garrett believes there are more &#34;medium-term impacted&#34; trade opportunities, such as airlines and jet fuel.
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SCHG

The head of Goldman Sachs' US trading desk warned that the gross leverage ratio of US stocks has reached 310%, sitting at the 98th percentile over five years, while the net leverage ratio is only at the 21st percentile. This structural imbalance hides deleveraging risks; CTA buying momentum is waning and technical tailwinds are fading. The Strait of Hormuz closed again over the weekend, causing oil prices to surge nearly 8% in a single day and US stock futures to drop—the timing for a pullback may have matured. Goldman Sachs remains bullish on emerging markets and fertilizers

- Last Friday, the S&P 500 reached a historic high, prompting Goldman Sachs to warn that the market is nearing a correction point.  
- John Flood, head of U.S. trading at Goldman, noted high total leverage at 310% and low net leverage at 75%, indicating a crowded market that may face significant de-leveraging pressure if sentiment shifts.  
- Upcoming earnings reports from 24% of S&P 500 companies are expected to provide critical directional signals for the market amid cautious optimism and ongoing geopolitical tensions.

Goldman Sachs Trader: US Stocks Ready for This Week's Pullback