Wall Street forecasters are warning that the risk of another sharp stock market decline has increased significantly, driven by mounting concerns over software sector volatility and weakening market momentum. According to Goldman Sachs analysts, the probability of another stock market drawdown has risen from 23% to 28% in recent weeks, reflecting increased turbulence in US equities and the technology sector in particular.
The investment bank issued the warning in a note to clients on Tuesday, pointing to several technical indicators that have historically preceded market corrections. The assessment comes as software stocks continue to face pressure, contributing to broader uncertainty about the sustainability of the current market rally.
Stock Market Momentum Signals Potential Trouble Ahead
Goldman Sachs highlighted the decline in equity momentum as a particularly troubling signal for investors. While the S&P 500 has posted gains over the past six months, the index’s momentum has fallen approximately 4.3%, a threshold that historically indicates larger stock market drawdowns may be approaching. According to the bank’s analysis of market movements dating back to 1950, when momentum drops below this critical level, the index has averaged a 10% decline over the following 12 months.
The current momentum unwind is hovering right at this crucial threshold, raising concerns among market strategists. Additionally, the situation reflects how quickly market sentiment can shift, even as headline index numbers remain positive.
Technical Analysts Flag Additional Warning Signs
Piper Sandler’s technical analysts echoed similar concerns about market conditions. In a client note released on Wednesday, the firm warned that short-term momentum oscillators suggest a fatigued market that could be setting up for a pullback within its broader uptrend. The firm advised investors to exercise caution when chasing breakouts and to wait for confirmed support levels before adding to positions.
Meanwhile, Torsten Slok, chief economist at Apollo, identified additional vulnerabilities in market structure. In his Wednesday analysis, Slok noted that more companies in the S&P 500 are now trading based on their individual fundamentals rather than moving collectively as a group. Furthermore, an increasing number of stocks are experiencing single-day price swings exceeding 10%, suggesting heightened volatility across the market.
Options Trading Activity Suggests Increased Market Fragility
Slok also pointed to elevated options trading activity in the S&P 500 as evidence of potential instability. According to his analysis, the current level of options trading appears extremely elevated, indicating heavy retail speculation and leverage-like exposure among investors. This type of market structure, combined with larger company-specific price movements, leaves the market more vulnerable to sudden and outsized swings.
The heightened options activity suggests that many investors are using derivatives to amplify their market exposure. However, this increased leverage can magnify both gains and losses, potentially accelerating any market decline that materializes.
Software Sector Turmoil Adds to Concerns
The warnings come amid ongoing turbulence in the software and broader technology sectors, which have experienced significant selling pressure in recent weeks. These sectors have been key drivers of market performance in recent years, making their current weakness particularly concerning for overall stock market health. The potential for what some analysts have termed a “software apocalypse” adds another layer of uncertainty to an already precarious market environment.
Market participants will be closely monitoring momentum indicators and sector-specific developments in coming weeks to assess whether the technical warning signs translate into actual market declines. The timing and severity of any potential pullback remain uncertain, though strategists are clearly positioning for increased caution.
