Not Big Tech, but these stocks will lead the next US rally, as per Goldman Sachs

Goldman Sachs believes that short sellers will be responsible for the next leg of rally that the US stock markets will see. All three major indices are already trading at or near record high levels.

According to data tracked by S3 partners, the total bearish positions across US and Canadian equities have surged by over $100 billion from late-April to reach $2.13 trillion, which is an all-time high. The data tracks all the way back to 2010.

The median short interest in the S&P 500, which is at record high levels, is now at 3% of market capitalization, the highest since late-2011, according to Goldman Sachs' prime brokerage.

Such a setup is a pivot point, according to the trading desk of the investment bank. "The next leg higher for US equities is more likely to be fueled by short-squeezes, that force buying in pockets of the market outside of the megacap tech names that have led this two-month rally," Goldman Sachs' note said.

Goldman Sachs highlighted that bearish positions remain the most elevated in the defensive sectors, with the median short interest in healthcare stocks at a 30-year high, while those in utilities and consumer staples is close to record high levels.

IT continues to remain the sector carrying the biggest short interest in absolute terms, along with a notable increase seen in industrial, financials, and energy as well, according to S3 Partners.

A short squeeze generally occurs when investors are forced to unwind short positions and buy back the shares borrowed from brokers, which amplifies the upmove, particularly in sectors which have aggressive short positions.

Market volatility has also ebbed on optimism of a potential US-Iran trade deal, with the CBOE VIX dropping to the lowest level since January. The Goldman Sachs US volatility Panic index, which surged to 9.5-10 multiple times between March and April, has since slumped to 2.6.

“The market today feels far less vulnerable to broad panic and much more vulnerable to leadership disruption,” the Goldman traders wrote, pointing to heavy investor concentration in the same narrow group of AI-linked winners.

(With Inputs From Agencies)