After a fierce rebound in the US stock market and institutions frantically buying at the bottom, Wall Street is now issuing a warning: be cautious about taking profits!

After the dismal fall last month, US stocks continued to rebound under the positive stimulus of the end of the interest rate hike cycle in major central banks in Europe and the United States, as well as the decline in long-term bond yields. Goldman Sachs cited data showing that institutional investors bought US stocks at the fastest pace in two years last week. However, several Wall Street banks believe that the upward trend in US stocks will not be sustainable.

Institutions are frantically bottom fishing

According to a report released earlier by Goldman Sachs' bulk brokerage trading platform, institutional investors have flocked to the US stock market, setting a record for the biggest five-day buying frenzy since December 2021 as of November 3.

Goldman Sachs stated that hedge funds' long positions in technology stocks reached their highest level in eight months. In addition, consumer companies such as restaurants and fashion received significant net purchases, while healthcare and financial stocks experienced net sales.

Overnight, the Dow Jones and S&P 500 both rose for seven consecutive days, reaching their highest level in nearly seven weeks since September 20; the Nasdaq rose for eight consecutive days, reaching its highest level in nearly four weeks since October 11. Both the S&P 500 and the Nasdaq have achieved their longest consecutive rise since November 8, 2021, in two years.

However, small-cap stocks performed differently from the broader market, with the Russell 2000 small-cap index falling for two consecutive days from its two-and-a-half-week high. Value stocks also underperformed growth stocks.

The poor performance of small-cap stocks indicates that there are some potential concerns in the market about the impact of economic downturn, inflation, and the continued interest rate hikes by the Federal Reserve. Compared with mega-cap companies, these companies have more limited sources of revenue and weaker ability to pass on higher costs. They are also more sensitive to slowing growth and changes in borrowing costs.

The weakness of value stocks relative to growth stocks may also indicate that investors are not optimistic about the performance of the US economy as a whole.

The Goldman Sachs report also pointed out that hedge funds' largest buying activity was concentrated in North America, while net outflows were seen in Europe and Asia, except for Japan.

Wall Street banks warn that the upward trend is not sustainable

However, Michael Wilson, the chief strategist of Morgan Stanley and a major bear in the US stock market, poured cold water on the upward trend of US stocks. He believes that the best week for the market in the past year is just a bear market rebound, and the current rise in US stocks lacks technical and fundamental support.

Wilson pointed out that due to dim corporate profit prospects, weak macroeconomic data, and deteriorating analyst views, "we find it difficult to be more excited about the year-end rebound."

He believes that the current upward trend in US stocks "looks more like a bear market rebound rather than the beginning of a sustained rise."

Another strategist at Morgan Stanley, Chris Montagu, also believes that the recent flow of contract funds tracking benchmark indices was mainly due to short covering. He believes that institutions still have a "moderately bearish" view on the overall performance of US stocks.

Montagu also pointed out:

"In short, profit-taking has led to a clearer market positioning, reducing overall position risk. Against the backdrop of further short covering, the possibility of a short-term market rally seems limited."

Several analysts from major banks also believe that it is difficult for US stocks to sustain their upward momentum against the backdrop of rising interest rates and slowing economic growth.

It is worth mentioning that November is also the beginning of the bear market for 2021-2022.

In November 2021, the Nasdaq reached its peak, and the S&P 500 reached its highest level a few weeks later. Then, a long bear market began, with the Nasdaq plummeting 35% from the end of 2021 to October of last year, and the S&P 500 falling nearly 30%.