3 reasons why the stock market still has room to run higher, according to Goldman Sachs

• Goldman Sachs sees the S&P 500 finishing the year at 4,700, about 8% higher from current levels.
• Stocks have slumped about 5% in August after rallying 21% in the first seven months of the year.

Markets have slumped in August following a 21% surge in the first seven months of the year, but Goldman Sachs still sees reason for bullishness as the odds of recession decline.

The bank forecasts the S&P 500 to finish the year at 4,700, about 8% higher than current levels, and strategists told clients in a Friday note that there's little reason to fret over this month's weak performance.

"We find that US investors have room to further increase their exposure to equities," strategists led by David Kostin wrote. "Should the US economy continue on its path to a soft landing, we believe the recent decrease in equity length will be short-lived."

Buybacks

First, Goldman pointed to the re-opening of the buyback blackout window as something that will boost demand for stocks in the coming weeks. While a flood of expected equity issuance in the fall could offset this, upside remains.

The bank's buybacks desk reported that 95% of S&P 500 companies hae exited their blackout windows, and that buyback executions so far in August have registered about 40% above average 2023 levels.

"Alongside elevated repurchase activity, our Buyback basket (GSTHREPO) has historically performed particularly well following the 2Q earnings season," strategists wrote. "Despite a year-over-year decline in overall buyback executions, the basket has outperformed the equal-weight S&P 500 by 4 pp YTD (+8% vs. +4%)."

Retail activity

Second, the firm still sees potential for retail traders to jump back into the market, despite recent weakness in several popular stocks. With the AAII Bull-Bear spread ticking higher, the strategists said, everyday traders could turn more bullish.

"Data released from FINRA this week show that margin balances increased in each of the first seven months of the year and are now at the highest level since February 2022, scaled relative to US equity market cap," according to Goldman. In effect, higher levels of margin debt means retail traders have capacity to buy more stock.

Funds pile in

Finally, Goldman pointed out that hedge funds and mutual funds could add to their equity exposure as market conditions improve. The net leverage for hedge funds stands below the five-year average, and should a soft-landing scenario become clearer, that could mean more stock gets added to portfolios.

"Similarly, mutual fund cash allocations remain 50 bp above their all-time low of 1.5% in December 2021," strategists wrote. "If mutual funds cut their cash exposures to the 2021 low, that would represent an additional $49 billion of equity demand."