Goldman Warning: Low-Volatility Calm May Be Fading for Equities
The S&P 500 heads into Friday’s trading fresh off its 18th record close of the year, powered by strong U.S. corporate earnings—helped by AI-related spending—and growing expectations for a more dovish Federal Reserve, according to Goldman Sachs.
This run has been accompanied by tighter credit spreads, shrinking risk premiums, and subdued market swings. The Cboe Volatility Index (VIX) dipped below 14.5 this week, its lowest since December.
But Goldman strategists Christian Mueller-Glissmann and Andrea Ferrari caution that the backdrop is shifting. Compared with past low-volatility phases, they see “less friendly” conditions—where upside potential is limited, but the odds of a pullback are rising.
High valuations and weakening business-cycle momentum, worsened by softer labor market data, are raising drawdown risks.
Added pressure comes from tariff uncertainty, which could slow growth, fuel inflation, and limit the scope for Fed rate cuts—while geopolitical risks persist. Goldman’s S&P 500 drawdown probability index now shows risk levels comparable to April’s spike after Trump’s “Liberation Day” tariff announcement.
The bank’s economists expect U.S. growth to stay subdued in the second half of the year. While that could lead to more Fed easing, it may also bring greater equity volatility.
Goldman remains “tactically neutral” on asset allocation—overweight cash, neutral on equities, credit, and bonds, and underweight commodities. They recommend using inexpensive put spreads to hedge against market declines, as well as selective put options on emerging and European markets, including Brazil’s Bovespa, India’s Nifty 50, and China’s CSI 300.
On the upside, they highlight calls on the S&P 500 Equal Weight Index as a potential play if the rally broadens beyond mega-cap tech.
