Written by: Bao Yilong

After experiencing a severe sell-off, the US stock market's technical aspects and positions are synchronously repairing, with major Wall Street institutions like Goldman Sachs signaling a year-end rebound. However, behind this potential "Christmas rally," lies a risk that is becoming increasingly hard to ignore: inflationary pressures are building at a speed that surpasses the peak during the COVID-19 pandemic, and the bills will be due in January next year.

On November 13, Goldman Sachs strategist Cosimo Codacci-Pisanelli straightforwardly asked in his latest macro report, "Can Christmas come early?" His answer was affirmative.

The recent significant market correction, declining valuation multiples, reduced market positions, and seasonal factors together create conditions for a year-end short squeeze in risk assets.

At the same time, Morgan Stanley and JPMorgan also issued similar signals, with the former's data showing that the AI sector is experiencing the largest concentration of short positions and deleveraging in over 15 years, while the latter directly advised clients to buy on dips.

However, there is an inherent paradox in the narrative of this year-end rebound: when Goldman Sachs, Morgan Stanley, and JPMorgan all call for the same trading direction almost simultaneously, what was originally a niche "year-end short squeeze" turns into a crowded consensus trade. Codacci-Pisanelli himself acknowledged at the end of the report that the trading logic for 2026 is precisely to "short every consensus trade."

Extreme position clearance, conditions for short squeeze take shape

The core argument for this potential rebound comes from the extreme clearance of positions.

According to Goldman Sachs, this round of deleveraging "is one of the most aggressive phases in the past decade," with net positions and total positions on its US prime brokerage book shrinking significantly. On the day when news of Nvidia's board seeking a successor for Jensen Huang shocked the market, the Nasdaq dropped about 5 standard deviations in a single day.

Data from Morgan Stanley corroborates this. According to Bloomberg, Morgan Stanley's prime brokerage business found that hedge funds have recently turned their net position in the AI sector into an underweight status, the first time since 2023, and the length of this round of hedge fund deleveraging is the longest in over 15 years. Last week, JPMorgan also informed clients that current market sentiment is "quite bad — and this should be a bullish signal."

Goldman Sachs believes that the market has digested multiple bearish factors in a single week — including stronger-than-expected CPI data, hawkish statements from the Federal Reserve, rising interest rates, higher oil prices, and negative news about Nvidia — yet prices have remained relatively stable, which itself suggests that "selling pressure is close to exhaustion." In the absence of remaining selling pressure, even bad news is unlikely to further depress prices.

Valuation returns to the mean, EPS expectations revised up

Valuation repair is the second pillar of Goldman Sachs' rebound logic.

Codacci-Pisanelli points out that after this round of valuation multiple contraction, global stock market valuations have returned to "near the long-term historical average of 35 years." Specifically, the 12-month forward P/E ratio of the MSCI global index has dropped to 15.6 times, and the price-to-earnings growth (PEG) ratio has fallen to 1.1 times, both nearing historical averages since 1997.

Meanwhile, earnings expectations have not been synchronized downward. The market's consensus EPS estimates for 2026, 2027, especially for 2028, have been continuously revised upward at a speed exceeding historical norms recently; the earnings expectation curve for 2028, as described by Goldman Sachs, "looks more like a meme stock than a profit forecast line."

In the context of currently high real interest rates, the absolute valuation of US stocks no longer appears excessively stretched. Goldman Sachs conducted a regression analysis of the S&P 500's forward P/E ratio against the 10-year real interest rate, which is currently about 2.25%, with a corresponding reasonable valuation of about 18.9 times, while the S&P is currently trading at about 17.9 times — just below the regression line by about one multiple unit.

Goldman admits that the outlook for the AI sector "remains highly uncertain," and has pegged the key validation point for demand on the upcoming fourth-quarter earnings season. However, in the preceding six weeks, the emergence of new panic catalysts has been limited — precisely the hallmark of a short squeeze environment.

Inflation pipeline pressure, far exceeding pandemic peaks

The flip side of the Christmas rally is the more unsettling part of Goldman Sachs' report.

Codacci-Pisanelli wrote that the US CPI consistently exceeded expectations in September and October, with a broad range of exceedances. The annualized rate of global manufacturing import price inflation is currently about 24%, well exceeding the inflation peaks during the pandemic of 2021 to 2022; the annualized increase in global producer prices is about 11%.

The scope of inflation is also extending, no longer limited to energy and AI hardware, but has spread downstream to categories like chemicals, plastics, and paper products.

In the US, Germany, France, Italy, and the UK, the proportion of imported price categories with an annualized increase of over 5% has jumped to about 25% to 40%; in the US producer prices, this proportion exceeds 40%, a level last seen on the eve of the inflation wave of 2021 to 2022.

The PPI data released on Friday did not change this picture. Although the month-on-month increase of the October PPI was slightly below expectations at 0.3%, year-on-year it stood at 6.5%, but inflation pressures remain significant. The previously released CPI on Tuesday was only below one in 70 forecasts, indicating the widespread exceedance.

Goldman Sachs believes that companies are currently absorbing rising input costs by compressing profit margins, but how long this buffer can be maintained is the core issue.

January is the true test

Upstream price pressure usually takes 6 to 12 months to fully transmit to the consumer end, meaning the bills will come due in the first quarter of next year.

Goldman Sachs previously conducted a detailed statistical analysis of the "January price reset effect": historically, January is the month when there is the most significant reset in prices across various categories, with about 16 categories experiencing price jumps exceeding 2 standard deviations in January, while this number typically does not exceed 2.5 in other months. The European market also shows the same seasonal pattern, with January’s core HICP data often reflecting the largest increase for the year since the pandemic.

It is against this backdrop that Goldman Sachs economists have raised their Fed interest rate hike predictions after the latest CPI data release, now including an additional third rate hike.

Codacci-Pisanelli also pointed out a hidden reflexive loop: previously, central banks leaned towards dovish because they were constrained by pressures from stock market declines and tightening credit. If the stock market stabilizes and the financial environment eases, the rationale for central banks to remain cautious will disappear.

In other words, if the year-end short squeeze materializes, it will deplete future capital appreciation, and after the revelry, it will be inevitable to face a "hangover." In terms of interest rate trading direction, Goldman Sachs clearly states:

Going long on near-term inflation is a good complement to the current investment portfolio.

Goldman itself admits in the report that 2026 "will be an extremely difficult year for macro traders, with pitfalls almost everywhere across major asset classes"; and in hindsight, the only effective trading rule for that year is to "short every consensus trade."

As Codacci-Pisanelli wrote at the end of the report: even if Santa arrives as expected, the intermediate goods PPI increase driven by energy shocks has surpassed the increase in final demand prices, manufacturing import price growth exceeds the pandemic peak, and major enterprises are awaiting re-pricing in January — this bill, regardless of whether the Christmas rally materializes, will be delivered on time in the first quarter of next year.

The last line of the report is: "Good luck."

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