Speculative trading is experiencing a resurgence reminiscent of past frothy market phases, and Goldman Sachs analysts warn this momentum could become a drag on the S&P 500 over a multi-year horizon. While equity indices often climb in the wake of these speculative bursts—driven by retail enthusiasm, lofty valuations, and leverage—the euphoria tends to unwind in the 18–24-month window as crowded trades reverse. Understanding the key drivers behind this rally and preparing defensive strategies can help investors navigate potential turbulence ahead.
One primary gauge of froth is the Speculative Trading Indicator (STI), which measures turnover in unprofitable, penny, and high EV/sales stocks. Goldman’s STI recently climbed near levels seen in early 2021 and the dot-com era, signaling extreme risk appetite. When investors pile into names lacking earnings or fundamental support, it boosts headline indices but concentrates risk among a handful of overbought names.
A second signal is the surge in call option volume, where bullish bets now account for roughly 61% of all trades— the highest proportion since 2021. As detailed in the CBOE data, retail and institutional players have favored deep-out-of-the-money calls, effectively magnifying leverage and volatility exposure. Such positioning can fuel sharp rallies during low realized volatility but leaves markets vulnerable to sudden sentiment shifts.
Special Purpose Acquisition Companies (SPACs) have also returned in force, raising close to $9 billion in Q2 2025. This marks the busiest quarter for SPAC issuances since early 2022. While SPACs can offer attractive entry points and liquidity for speculative capital, their rapid proliferation often coincides with indiscriminate bets on untested management teams and business models. Investors chasing these structures should weigh dilution risk and sponsor incentives.
Short-squeeze episodes have further amplified trading mania. Goldman’s basket of heavily shorted stocks posted gains north of 60% since April 2025—levels only eclipsed by the 1999–2000 tech bubble and the 2020–21 meme stock surge. Names like Kohl’s (KSS) and Krispy Kreme (KRIS) exemplify how retail coordination and gamma-squeeze mechanics can inflate valuations far beyond fundamentals.
In the short run, these speculative thrusts often coincide with above-average S&P 500 returns. Historical backtests show that 3-, 6-, and 12-month performance following STI spikes tends to outperform by 200–300 basis points. Momentum among high-beta names can lift the headline index, creating a “rising tide” for broader market sentiment—albeit temporarily.
The bigger risk materializes beyond 18–24 months, when crowded trades unwind, driving a “catch-down” correction. Profit-taking, margin calls, and de-leveraging can trigger bouts of volatility that disproportionately impact the most speculative segments. Given record valuations and narrow market breadth—where a handful of megacaps account for much of the S&P’s gains—investors may face steeper drawdowns if euphoria gives way to capitulation.
To manage these headwinds, investors should reassess portfolio positioning. Trimming exposure to high EV/sales and zero-earnings names can reduce vulnerability to valuation resets. Rotating into sectors with stronger earnings visibility—such as healthcare, consumer staples, and industrials—can anchor returns when speculative froth subsides. Maintaining adequate cash buffers also offers dry powder to redeploy into quality assets at more attractive levels.
Tactical hedges can further mitigate downside risk. Purchasing deep-out-of-the-money put options on the S&P 500 or related ETFs (like SPY) provides cheap insurance against sudden breadth-driven sell-offs. Alternatively, structured collars limiting upside while capping downside can protect gains without committing large premium outlays.
In conclusion, the current speculative environment—characterized by STI extremes, call-option leverage, SPAC issuance, and short squeezes—presents a two-edged sword for the S&P 500. While indices may continue to climb in the near term, the unwinding of crowded trades poses a significant headwind over a multi-year horizon. By rebalancing toward quality factors, employing tactical hedges, and monitoring risk appetite indicators, investors can better navigate the inevitable volatility that follows market froth.
For further reading on market breadth and technical signals, explore the S&P 500 Official Site and research notes from Goldman Sachs Insights.