Barclays expects the S&P 500 to experience a cumulative pullback of around 6 to 7%, as leveraged ETF passive rebalancing is triggering a feedback loop of volatility.

BlockBeats News, June 10th. Alex Altmann, Global Equities Tactical Strategy Director at Barclays, stated in a podcast that he has shifted his view on the U.S. stock market to short-term tactical caution. Alex Altmann has been contrarian since September last year and remained bullish even during the Iran conflict in March this year, both of which were eventually validated. However, what triggered his current shift was the accumulation of multiple signals in the past two weeks: a significant increase in funding costs driving up real yields, squeezing stock valuation multiples; retail investor excitement levels in some cases even higher than in 2021, when in a deep negative real interest rate environment, compared to the current positive real interest rate environment; and almost no short positions on the institutional side. Alex Altmann pointed out: when excitement reaches such levels, the expected return curve for the S&P 500 no longer looks attractive.

Altmann has particular concerns about leveraged ETFs, as these products, through daily rebalancing, may drive disproportionate stock trading volume through underlying channels, forming a self-reinforcing spiral of ups and downs, a phenomenon that has been playing out over the past few weeks. The resurgence of momentum trading makes crowded positions highly vulnerable to sharp pullbacks triggered by minor position adjustments or narrative shifts. Altmann expects the S&P 500 to experience a cumulative pullback of about 6% to 7%, based on recent declines, with the process likely already halfway through. To turn bullish again, he hopes to see further stock price declines to squeeze out excitement, successful market digestion of large IPOs, and a decline in real yields. If the new Fed chair can verbally suppress real yields and provide reassurance, it will also be a market tailwind.