Goldman Sachs Predicts Software Stock Recovery Despite Record Short Positions

Goldman Sachs believes U.S. software and technology stocks will continue their recent recovery, even as hedge funds hold record-high short positions against the sector. The S&P 500 software index has dropped over 18% this year but rebounded more than 4% this week.

Investment banking giant Goldman Sachs is forecasting continued gains for American software and technology service companies, despite hedge funds betting against these stocks at unprecedented levels.

According to a client note from Goldman Sachs prime brokerage released Wednesday and reviewed by Reuters Thursday, the financial firm expects the recent upward momentum in software stocks to persist.

The technology sector has faced significant challenges this year, with the S&P 500 software and services index plummeting more than 18% since January, wiping out over $1.2 trillion in market capitalization based on LSEG data. However, the index bounced back this week with gains exceeding 4%.

Goldman’s analysis reveals striking market dynamics within the sector. On February 24th, software and information technology services ranked as the two most heavily shorted American industries on Goldman Sachs’ prime brokerage trading platform.

The investment bank’s data shows short positions – bets that stock prices will decline – have reached their highest levels since Goldman began monitoring these metrics in 2016. Meanwhile, long positions, which represent confidence that share prices will increase, have fallen to record lows.

This contrarian positioning by Goldman suggests the firm sees opportunity where others perceive risk, betting that the software sector’s recent struggles may be creating buying opportunities for investors willing to go against current market sentiment.