Video Title: Why US Stocks Could Climb Higher
Video Author: Chris Hussey, The Markets
Translation: Peggy

Editor's Note: As US stocks once again approach historical highs, AI trading remains crowded, and renewed interest rate expectations disrupt valuations, market discussions are shifting from "Can tech stocks still rise" to "What underlying structure is supporting this rally." As buying the dip has almost become investors' reflex, a more critical question is emerging: Is the current stock market rally driven by short-term sentiment or has it already formed a deeper funding, profit, and supply-demand cycle?

This article is based on a conversation from a Goldman Sachs podcast, "The Markets." In the episode, host Chris Hussey and John Flood, Head of Americas Equity Sales Trading at Goldman Sachs Global Banking and Markets, discussed stock market volatility, IPO supply, buybacks, semiconductor trades, interest rate risks, and earnings momentum.

In this discussion, John Flood's key insight is to break down the question of "Can US stocks continue to rise" into a set of more fundamental structural questions: Is funding still willing to accept supply, will profits continue to materialize, will interest rates disrupt valuation balance, and has the crowded AI trade already been debunked.

Firstly, the volatility has shifted from a risk signal to a result of fund reallocation. In the past, heavy trading volume and market fluctuations were often seen as signs of a weakening trend. However, Flood believes that recent volatility does not necessarily mean a crack in tech stock trading. With a record single-day trading volume of 34 billion shares in the US market, the reflection is not panic in a single direction but rather a simultaneous adjustment of retail, institutional, and corporate funds. Especially before technical events like the Russell index rebalancing, the volatility appears more like an outward manifestation of portfolio rebalancing. This implies that as long as funds continue to rotate within the market, a pullback may not signify the end of a trend but could continue to be a buying opportunity.

Secondly, the supply pressure has not overwhelmed the market, indicating that the buy-side structure is stronger than it appears. In the past, IPOs and large-scale financing were often seen as draining secondary market liquidity. However, in June, two high-profile issuances totaling a nominal amount of $140 billion saw minimal market pressure, indicating that the additional supply is being absorbed by strong demand. More importantly, retail investors have remained consistent buyers this year, and institutions have shown clear demand for large offerings. Meanwhile, corporate buybacks are shifting from the Mag Seven to a broader set of S&P 500 companies. The buyback force, once dominated by a few tech giants, is now showing horizontal expansion, reshaping the stock market's supply-demand structure beyond just relying on top tech stocks.

Third, AI-related trades are still crowded, but the crowding itself has not yet provided a reason for a reversal. Over the past year, semiconductors, storage, semiconductor equipment, and the Asian tech chain have become the market's most distinct theme, with funds expressing AI trades through exposure to South Korea, China, Taiwan, and others. However, in Flood's view, the reason these trades are crowded is that they are still delivering results. The current risk is not that the market is unaware that this theme is already popular, but that until AI profit momentum is discredited, funds will find it difficult to identify a more compelling alternative direction. Some of the Mag Seven are used as a source of funds for maneuvering positions, which could instead bring new entry points.

Fourth, interest rates remain the most distinct disruptive variable in this bull market. In the past, the market mainly focused on growth and earnings, but with the Fed's hawkish tilt and the market pricing in about 40 basis points of rate hikes by the end of the year, interest rates have once again become a key constraint on the valuation system. Flood's judgment on this is not aggressive: if there are no more rate hikes this year, the market may interpret "standing pat" as a disguised easing. In other words, the real risk of interest rates lies not only in their absolute level but in whether they deviate from the path already factored into the market.

Fifth, earnings are still the hardest underlying logic of this bull market. The previous rise in tech stocks was easy to attribute to sentiment and valuation expansion, but in the first quarter, the median S&P stock saw earnings grow by 14%, one of the strongest quarters in decades. Market expectations for the second quarter still suggest about 9% year-on-year growth. If earnings reports continue to approach this level, the rise will not only be a valuation trade but the result of continued earnings upgrades. Whether the S&P 500 can break through 8000 points ultimately depends on whether this earnings trend can continue to validate.

If we were to compress this conversation into one assessment, it would be: the current strength of the U.S. stock market does not only come from the AI narrative but from the structural support formed by the combination of fund supply and demand, corporate buybacks, earnings growth, and interest rate expectations. In this sense, the subject of this article is no longer just a short-term market assessment by a Goldman Sachs trader but a question of how the U.S. stock bull market continues to find support amidst high valuations, high crowding, and high interest rate uncertainty.

The original text is as follows (reorganized for readability):

TL;DR

· Increased stock market volatility does not mean a trend reversal. Goldman Sachs traders are more inclined to view pullbacks as buying opportunities after fund reallocation.

· The surge in IPO supply has not overwhelmed the market, indicating that current buying pressure comes not only from a few tech stocks but from institutions, retail investors, and corporate funds collectively supporting the market.

· Buyback support is shifting from the Mag Seven to a broader range of S&P 500 companies, making the U.S. stock market's supply-demand structure more stable than the surface-level "issuance pressure" suggests.

· Semiconductors, Storage, and Asian Tech Chain remain the most crowded trades, with the essence being that AI profit momentum has not been falsified, and funds are still willing to endure volatility.

· Interest rates are the current biggest risk variable for US stocks, and if there is no further rate hike this year, the market may reprice "standing pat" as a positive.

· The core of this bull market is still profits rather than emotions. As long as second-quarter earnings continue to deliver growth, the logic of the S&P 500 hitting 8000 points remains intact.

Interview Content

Chris Hussey: Welcome to "The Markets." I'm Chris Hussey, and today is June 25, Thursday. I'm now in the Goldman Sachs trading floor, joined by John Flood, the Head of Global Banking and Markets Department Americas Equity Sales Trading. Floody, thank you for being on the show.

John Flood: Thanks for having me.

Volatility Will Continue, but US Stocks Still in "Buy the Dip" Mode

Chris Hussey: Alright, I know you're keeping an eye on many things right now, and we'll get to all of that in a minute. But let's start with this week's market because it seems like market volatility is picking up again. How do you see it? Are tech stocks showing signs of cracking? Or is this actually an opportunity to buy the dip?

John Flood: I still believe we are in a "buy the dip" mode. Just a reminder, tomorrow is the Russell Index rebalance day, and typically, before this event, the market experiences waves of fluctuations.

Also, a week ago, today looking back a week, we were talking about the Knicks' parade, which was amazing—Go Knicks—that day, all US stock exchanges collectively traded 34 billion shares. It was the most active trading day in stock market history, breaking the record set on the 2025 "Liberation Day."

This tells me that all types of investors are adjusting their portfolios, whether it's retail, institutional, or corporate fundings, all are reallocating. So, I believe volatility will continue, but the overall trend of the market is still upward. Downturns will still offer decent buying opportunities.

Chris Hussey: That's truly astonishing. I hadn't realized before that on one side, there were 2 million people watching the Knicks parade in downtown Manhattan, while on the other side, the stock market recorded its highest trading day.

It's fascinating. Thankfully, we no longer have to manually shout orders on the NYSE floor, or it would have been very challenging that day.

Alright, let's talk about supply because supply is a key factor in the current market. IPOs are clearly heating up. What do these recent high-profile IPOs mean for the market?

Surge in IPO Supply, Why Can the Market Still Absorb It?

John Flood: Yes, in the span of two weeks in June, we saw two highly anticipated deals. The combined total size of these two deals reached $140 billion, making it the largest and second-largest primary market financing in the U.S. market over a two-week period in history. It's quite remarkable.

But the stock market hardly reacted. At our trading desk, we saw significant institutional demand for these offerings. More importantly, we've had many discussions with clients about retail demand. Retail investors have been the most consistent buyers of stocks this year. As these high-profile IPOs continue to be completed, I feel that retail buying pressure is still intensifying. I expect this trend to continue for the remainder of the year.

Chris Hussey: Alright. Another theme on the supply side, of course, is the other side of issuance, which is buybacks and mergers and acquisitions. The M&A environment is strong, and as for buybacks, considering how much the market has already risen, you may not be so sure. Are they enough to offset these issuances?

John Flood: The conclusion is: they are. And this might surprise many people because when we talk about buybacks in the past, we would mainly mention the "Mag Seven" dominating most of the buyback activity.

However, on our corporate buyback trading desk, we see buying interest broadening, which is a positive signal. Two years ago, on an active buyback trading day, there would probably be around 10 buyback programs running. This year, it's more like 50 to 60.

In other words, across the entire S&P 500, besides the Mag Seven, relatively smaller companies are also starting to engage in buybacks. I believe this trend will continue.

My intuition is that even if some of the Mag Seven companies pause their buybacks this year, in terms of nominal amount and the number of companies participating in buybacks, we may still have a record year.

Semiconductors, Storage, Asia

Chris Hussey: Makes sense. Alright, John, we've covered supply enough, let's move on to the themes. You're currently focused on various themes. What is the most attractive theme catching your attention right now?

John Flood: I'm still keeping an eye on semiconductors and semiconductor equipment. This is where everyone is, and it's where everyone still wants to be.

We have seen a lot of funds expressing this trade through Asia ex. Japan, particularly South Korea and Chinese Taipei. Like we just said, when a trade gets crowded, gets hot, and indeed has performed well previously, it’s bound to have some volatility. But I think the upward trend will continue.

Semiconductors, storage, Asia – these are a few key words.

Simultaneously, due to some semiconductor, tech other parts, as well as some IPO-related trades needing to make way, we are also seeing some supply come out of the Mag Seven. So I actually believe that there are some attractive entry points in the Mag Seven sector right now. Because you've already seen hedge funds shorting the Mag Seven, or using it as a source of funds to make room for this new supply.

S&P 500 Rally to 8,000 Hinges on Earnings and Rates

Chris Hussey: Yes, that's a great point. The Mag Seven has now almost become the Top 10, as there are now three large semiconductor stocks with market caps over $1 trillion.

Alright, let’s put on our interest rate hat. While I know you are a stocks expert, another theme in the market is the Fed. Warsh chaired his first June meeting as Fed Chair. Your thoughts on rates? How do you think it will impact stocks?

John Flood: Well, I actually started off as an interest rate trader at Lehman Brothers back in 2006.

Chris Hussey: Ah.

John Flood: But it didn’t turn out too well, in the end.

Chris Hussey: I didn’t know that. I started at Lehman too.

John Flood: That's a long time ago now.

What the market is concerned about now is rates continuing to rise. I've just walked over from the trading desk, and the current market pricing indicates there's probably another 40 basis points of hikes to come by the year-end.

Chris Hussey: Wow.

John Flood: I would say this is the number one concern right now that could break this rally: higher inflation, rates higher than expected. I believe this Fed meeting will be more hawkish than the market anticipates.

But I also think we have the best team of economists on Wall Street. They don't see a rate hike this year. At the moment, if rates stay unchanged from now until year-end, the market will actually interpret it as a rate cut.

However, I do believe that we need to continue to closely monitor interest rates. This is the variable that everyone is truly concerned about. My view, aligned with our economists, is that there will be no rate hike. This would be positive for the stock market.

Chris Hussey: Yes, if the market has already priced in a 40 basis point rate hike and it doesn't materialize in the end, I think that would be very positive.

Alright, back to the present. It's hard to believe that next week we will be wrapping up the first half of the year, the second quarter, and June. In terms of earnings momentum, how are people feeling about the upcoming earnings season?

John Flood: Earnings have been the driving force behind this bull market. We believe that earnings will continue to propel the market upwards. This is actually the core of our bullish view.

In the first quarter, earnings for the S&P median stock grew by 14%. It was one of the best quarters in decades. The second quarter earnings season is about to kick off, and the current market expectation for median stocks is a 9% year-over-year growth.

If the final results come close to this level, which we believe they will, and manage to surpass this threshold, then earnings will still tell the same story: the fundamental backdrop still supports further market upside.

So, earnings have been very strong, and we believe they will continue to hold up well. The next thing to watch is what the second quarter will deliver.

Chris Hussey: That's a great point. We just came off one of the strongest quarters of earnings growth. If anyone is wondering why stocks are hitting all-time highs, the answer is actually quite simple.

Alright, let's wrap up. What's your favorite trade right now?

John Flood: My favorite trade right now is to continue betting on the directions that have already been working.

High momentum trades are quite crowded at the moment, but they are crowded for a reason. I think this includes semiconductors, as well as semiconductor equipment. I believe some areas in South Korea and Taiwan will continue to perform well.

So, from now until the end of the year, I like to stick with trades that have already proven to be effective. I also believe that the S&P 500 does have a shot at breaking above 8000 points in the near term. As we mentioned earlier, there are a lot of technical factors lining up favorably at the moment. Most importantly, earnings have been very strong and are expected to remain so.

Chris Hussey: But I have to ask, because you mentioned South Korea earlier. It had a day this week where it dropped 10%. Does that not shake your confidence?

John Flood: No.

Chris Hussey: I love that answer. That's FOGO—Fear Of Getting Out. Alright, what will you be watching next week? Because we’re wrapping up the first half of the year and heading into July.

John Flood: I also don’t want to completely ignore any bearish factors.

So, next week, as we've discussed, we are entering the final stretch of the first half of the year. There are some technical factors that could be a short-term headwind for the market. One of them is pension rebalancing. In simple terms, pensions need to adjust their portfolios to realign stocks and fixed income back to the appropriate ratio.

Due to stocks significantly outperforming fixed income, this pension rebalancing will bring about approximately $30 billion in U.S. stock selling pressure. The last two trading days of the first half of the year, June 29th and June 30th, will pose a short-term headwind.

So, if we see some weakness in the market early next week, I wouldn't be surprised. But it could also present a decent buying opportunity.

Chris Hussey: That’s an interesting catalyst, and not one that everyone will be watching. I like that observation a lot.

One last question, as July will bring the World Cup Finals. I know you love all sports on Earth. Who do you think will win the World Cup?

John Flood: Team USA all the way, bro.

Chris Hussey: Alright, why not? Next week, it’s also July 4th. That wraps up this edition of "The Markets." I’m Chris Hussey, thank you for tuning in.

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