Is Risk-On Back in Business?

By the end of March, as the S&P 500 flirted with correction territory, markets appeared to carve out a bottom. What followed has been an aggressive V-shaped recovery, with losses fully retraced in just 11 trading days. Since that low, the S&P has rallied roughly 10%, now sitting just below all-time highs and the elusive 7,000 level. Can we maintain this? 

History doesn’t repeat, but it often rhymes. Fading geopolitical risk appears to be rewarding investors willing to lean into price action. Despite the backdrop of war, the S&P has delivered a positive return of roughly 1% over the period, with no single trading day seeing a drawdown greater than 2%. Notably, this resilience came alongside deeply negative investor sentiment, with the S&P 500’s 14-day Relative Strength Index (RSI) breaking below 30 on March 30th—generally considered to be an oversold signal.

We saw a similar dynamic during the yen carry unwind in August 2024. In both cases, positioning and flows played a critical role. According to Goldman Sachs, Commodity Trading Advisor (CTA) flow forecasts—indicating the likelihood of inflows from programmatic trading platforms—are currently at a +4-sigma level, with $45 billion forecast to flow into U.S. equities over the next week. This marks the largest signal Goldman’s model has generated in years, with the only comparable episode occurring in the recovery of the sell-off in August 2024. 

The question at hand is whether this momentum can persist. Investors should remain mindful of the tail risks tied to geopolitical developments, particularly given oil’s status as a critical macro variable. Oil’s relationship with equities is notably negative—when the price of oil goes up, equities tend to go down—reflecting its role as a core input into the global economy. A further escalation in conflict could trigger a renewed drawdown in equities, accompanied by higher oil prices and upward pressure on rates. 

Navigating markets amid geopolitical uncertainty is inherently challenging. In this environment, the case remains strong for high-quality companies with durable pricing power and operational flexibility. When sentiment-driven volatility begins to clear, fundamentals tend to reassert themselves first. 

Sebastian Teper contributed to this article. Data sourced from Goldman Sachs and Strategas.