After November’s sharp correction, Goldman Sachs says multiple market indicators have "reset," creating a stronger foundation for a potential year-end rally. The firm’s latest market watch report highlights improved breadth, reduced volatility, and a shift in the AI investment theme from hype-driven sales to real-world applications.
November’s Shakeout
Goldman traders noted that expectations for a year-end rally had become overly crowded, with even long-term bears turning bullish. That optimism, combined with the Fed’s hawkish tone on Oct. 29, triggered a sharp correction.
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The unprofitable tech stock index fell 23% from its peak.
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The most shorted stock portfolio dropped 29%.
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Volatility surged, with the 20-day style factor climbing above 20, far outpacing the S&P 500’s moderate moves.
Goldman’s Lee Coppersmith said the swings were driven by "style factors," hitting growth, value, and AI winners hardest.
Signs of Stabilization
Since mid-November, several positive signals have emerged:
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Crowded bullish sentiment in the Big Seven tech stocks has eased.
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Options market distortions, such as put-call skew inversion, have disappeared.
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Positioning levels have returned to neutral.
Market breadth has also improved. The 5-day average of advancing vs. declining stocks in the S&P 500 rebounded from -150 in early November to +150, showing participation has broadened beyond a handful of names.
Volatility and Fund Flows
Goldman’s proprietary Volatility Index has dropped from its November highs to 5, only slightly above the three-year average of 4.6. Sub-indices measuring implied volatility and option skewness have cooled.
Systematic strategy funds, which sold about $16 billion through the S&P 500 last month, are expected to shift to moderate buying of roughly $4.7 billion in December. Goldman says this marks a "significant decrease" in tail risk from forced selling.
AI Theme Evolves
Perhaps most notable is the expansion of the AI investment narrative. Goldman’s new stock basket index tracks "old economy" companies using AI tools to cut costs and boost profits. This reflects a transition from simply "selling AI" to "using AI," with technology increasingly tied to measurable productivity gains.
The firm emphasized that the U.S. retains long-term strengths in intangible asset investment, resource allocation, and corporate scaling. AI applications, it argues, will become the next structural growth driver.
The Bottom Line
Goldman Sachs believes the combination of rebalanced tech positions, improved breadth, reduced volatility, and easing systemic pressures has created a clearer starting point for December. With panic subsiding and AI themes deepening, the foundation for a year-end rally looks more solid than it did just weeks ago.