Goldman Sachs (NYSE:GS) issued a warning that an S&P 500 correction is imminent and advised investors against buying the dip.
In a note to clients, an analyst at the investment bank highlights several indicators pointing towards a downturn in the market.
He points out that July 17 typically marks the end of a bullish period for the S&P 500, historically leading to a downturn.
In addition, Goldman Sachs notes the S&P 500 has experienced 38 new all-time highs this year, making it the second strongest in nearly 100 years, trailing only 1995.
"The pain trade is no longer higher from here. I am not buying the dip," the analyst emphasizes.
The note indicates that July's option expiration will likely lead to increased market volatility, as the current dealer long gamma position unwinds. With lower trading liquidity expected as vacations start, the market may see more pronounced movements.
The analyst observes that passive inflows have significantly slowed, with the market on close imbalance showing $8 billion in sales over the past three days.
Goldman Sachs further explains that August typically sees the largest equity outflows. They note that the top five stocks in the S&P 500 account for 41% of its gains, with a remarkably high bar set for these companies as they head into earnings season.
"If you allocate $1 into the S&P 500 ETF, SPY (NYSE:SPY), 29 cents goes into the top 5 stocks, a new record," the note states.
The Goldman Sachs analyst also highlights a shift in market dynamics, with small caps outperforming megacap tech in recent weeks, but warn that this rotation has not yet led to a broader market decline. They remain cautious about the sustainability of this trend, advising investors to stay vigilant.