Investors' “Goldilocks” summer could be coming to an end.
After months of ideal market conditions, Goldman Sachs (GS) warns that underlying risks could send stocks tumbling. The current backdrop of stable economic growth, moderate inflation, and a strong earnings season — fueled by Big Tech's AI spend and hopes for an interest rate cut — has created a summer of rally.
But a key factor behind the markets' stability has been a “volatility reset,” with investors accepting lower returns on riskier assets as the market avoids sharp price swings. Goldman noted that during “Goldilocks” regimes, low market and economic volatility typically lead to more stable returns. However, the bank warned that this calm could quickly turn into a storm if growth slows or the Fed tightens monetary policy.
“There is latent risk of unwinds in the event of negative growth and rate shocks,” Goldman Sachs analyst Christian Mueller-Glissmann wrote in a new note.
Despite the stability, Goldman's “equity asymmetry framework” — which combines market volatility data and broader economic indicators — suggests the chance of a major market rally is relatively low in the current climate, as large rallies typically occur during recoveries, when the market is bouncing back from a significant downturn.
However, the risk of a “drawdown,” or a sharp market decline, is now elevated, and this risk has only increased recently. According to Goldman, such drawdowns are often triggered by factors like high stock valuations and a weakening business cycle. As the S&P 500 (^GSPC) notches a string of record highs in 2025, there's little room for mistake in a market priced for perfection.
Goldman also noted the rally in the US stock market has been driven largely by a handful of large-cap tech stocks. While this has helped push the overall market higher, it also suggests that broader market participation is lacking.
“The US equity rally has again been concentrated in large cap US Tech stocks, and this has come alongside signs of more speculative behaviour among retail traders,” the firm notes. This concentration could pose a problem if these tech companies face any setbacks or if the broader market loses momentum.
Another concern that Goldman raised is the potential impact of macroeconomic challenges in the second half of the year, including the ongoing impact of tariffs on global growth, continued uncertainty around Fed policy, and growing geopolitical risks.
In the months ahead, these factors could weigh on the economy, and by extension, drag on corporate earnings and stock prices. “In our baseline view, macro headwinds are likely to pick up,” Mueller-Glissmann wrote.
