Risk appetite has fallen below zero. Is it already time to take a contrarian position?

  • Goldman Sachs’ Risk Appetite Indicator (RAI) has fallen to -0.5, its lowest level since April 2025. Historically, only readings below -1, particularly those near -2, have provided useful contrarian signals. The current level remains some distance from that range.
  • Goldman Sachs believes that, compared with late summer, cooling sentiment has reduced the constraints on gains in risk assets. This supports a moderately bullish view, but is not strong enough to justify a contrarian trade based on extreme pessimism.

Why does a technology-stock pullback affect other assets?

  • Recent cross-asset risk appetite and the relative performance of technology stocks have moved almost in lockstep: in recent weeks, the correlation between the RAI and the performance of the Nasdaq 100 relative to the equal-weighted S&P 500 index has been close to 1. The strength or weakness of technology stocks has become an important clue to overall market sentiment.
  • Over the past three weeks, differences in assets’ sensitivity to semiconductor stocks have explained differences in their performance better than their sensitivity to oil prices. Goldman Sachs also observed that the US dollar has become more procyclical, indicating that the focus of this episode of market co-movement is more firmly on technology stocks and risk sentiment.
  • There have also been buffers against the shock. Defensive, quality and value styles have outperformed the levels implied by pricing of global growth and monetary policy, helping the broader market withstand the unwinding of technology-led momentum trades.

Why have credit and government bonds moved in different directions?

  • Credit excess returns fell again last week by several standard deviations. The credit component was also a major driver of the decline in the RAI and weighed on the “global growth” factor in Goldman Sachs’ model, showing that the pressure was not confined to technology stocks.
  • Meanwhile, G4 ten-year government bonds rose, providing some protection against the sell-off in AI-related assets; falling bond yields also supported the “monetary policy” factor in the model. The coexistence of credit pressure and rising government bonds leaves room for diversification within portfolios.
  • Europe faces additional regional pressure: most euro-area-related assets have performed worse than can be explained by pricing of global growth and monetary policy. Goldman Sachs believes the widening of the French-German government bond spread has exceeded the range that fundamentals can explain.

Why does Goldman Sachs remain bullish, and what are the near-term volatility catalysts?

  • Goldman Sachs expects earnings support, lighter positioning and lower valuations to help equity markets through year-end. It therefore maintains an overweight in equities and an underweight in credit over both the 3-month and 12-month horizons. It also overweights cash over the 3-month horizon and bonds over the 12-month horizon, preserving a buffer in its bullish allocation.
  • A crowded near-term event calendar limits how smoothly this view can play out. Options markets are pricing in higher volatility for the next two weeks than for the following four: equity markets are more focused on earnings from Microsoft, Alphabet and Amazon this week, while longer-dated US Treasuries and high-yield credit are pricing in greater volatility around next week’s US midterm elections.
  • The situation in the Middle East and the midterm elections could prolong recent volatility. The Federal Reserve, Bank of Japan and European Central Bank also meet this week. Goldman Sachs economists expect the Fed to hold rates steady at this meeting, then raise them in December.