Goldman Sachs: Middle East Tensions Unresolved, Speculators Make Large Bets on a Pullback in U.S. Stocks

As tensions in the Middle East show no signs of easing, speculators are increasing their short bets against the U.S. stock market, expecting greater losses ahead. According to data compiled by Goldman Sachs’ main brokerage division, during the week ending March 6, hedge funds increased their short positions in stock exchange-traded funds (ETFs) by 8.3%. The data shows that in the past five years, such a rapid increase in short positions has only occurred once before.

As the conflict in the Middle East escalates, concerns over soaring oil prices and inflation are intensifying, leading to a weakening demand for U.S. stocks. The S&P 500 index fell 2% last week, and the CBOE Volatility Index (VIX) rose to its highest level since the April tariff turmoil.

However, short-term fund managers have not completely exited the U.S. stock market. For the first time in five weeks, hedge funds increased their holdings in individual stocks. This suggests that fund managers are eager to find low-priced buying opportunities in individual stocks, while remaining skeptical about the overall market.

Goldman Sachs Managing Director Lee Coppersmith wrote in a client report on Saturday, “Positioning and flow data reinforce the view that investors are increasing hedges but not truly reducing holdings.”

Last Friday, the S&P 500 declined 1.3%, with nine out of eleven sector groups falling. Although the index’s intraday low was less than 4% below its January all-time high, Goldman Sachs’ so-called U.S. volatility panic index surged to 9.72 (with a maximum of 10). Goldman strategists believe this divergence indicates a gap between internal pressures at the individual stock level and the relatively mild decline of the overall index.