Rapid rise in real interest rates, Goldman Sachs warns that 'systematic selling pressure' in US stocks is building at quarter-end

Goldman Sachs has issued a warning that the rapid rise in real interest rates is dampening risk appetite, and that month-end and quarter-end pension fund rebalancing, together with CTA sell-offs, could create additional supply pressure for US equities.

On September 29, Rich Privorotsky, head of equities at Goldman Sachs, commented that although the stock market has previously shown resilience, “the pace of interest rate increases, especially the speed of the rise in real interest rates, has reached a level that the market can no longer ignore.”

He emphasized that, for equities, the key factor is not just the absolute level of interest rates, but also the speed at which they rise. Data shows that when interest rates move sharply higher by about two standard deviations, the stock market tends to react more significantly.

Currently, the two standard deviation threshold has already been breached.

Privorotsky stated that the magnitude of real interest rate changes over the past month has been among the most dramatic since 2013. He added, “Greater interest rate volatility reduces both the willingness and the capacity of Wall Street intermediaries to take on risk.” This means that when rate volatility increases, the market's ability to absorb risk asset transactions may decline.

Within the equity market, the pressure is not evenly distributed. According to Privorotsky, there is already “pain” visible beneath the surface of the indices: small-caps, financials, and other longer-duration and more interest-rate-sensitive sectors are under significantly more pressure than large technology stocks.

Quarter-end fund rebalancing may trigger $3.3 billion in selling pressure

Privorotsky estimates that pension funds may sell approximately $3.3 billion in equities during month-end and quarter-end rebalancing. Of this, around $1.1 billion would be from monthly rebalancing and about $2.2 billion from quarterly rebalancing.

Goldman Sachs notes that this $3.3 billion sell-off estimate ranks at the 97th percentile in absolute terms among all buy and sell forecasts from the past three years; if the observation window is extended back to January 2000, it would be at the 98th percentile. Goldman Sachs also expects that pension funds will purchase a corresponding amount of bonds.

Privorotsky said that quarter-end and month-end fund flows could provide support for duration assets, so he is “tactically inclined” to explore this direction in strategy.

In addition to pension fund rebalancing, systematic flows could also bring further selling pressure.

According to Goldman Sachs’ CTA model, in a sideways market scenario, systematic managers such as CTAs could sell around $530 million in Russell 2000 futures over the next week. Privorotsky called this “one of the largest estimated sell-offs of the past six years.”

In the credit market, Privorotsky pointed out that stress is beginning to show, whereas equity volatility has yet to fully reflect this risk.

As for the path ahead, he believes that energy prices and interest rate trends remain key. He noted: “I can be extremely optimistic about artificial intelligence and its rate of progress, but at this stage, unless the issues related to energy and interest rates are solved, that optimism is almost irrelevant.”

He further stated that a pullback in oil prices may help ease rate pressures; if interest rates stabilize, it could create conditions for a broader equity rebound. On the other hand, quarter-end pension fund rebalancing and CTA selling of Russell 2000 futures could become flows that the market will need to absorb.