Bullish exuberance among retail traders drove a new meme stock rally this week. According to Goldman Sachs, it’s just the latest episode in “one of the sharpest short squeezes on record.”

And while it’s got room to run, it also raises the risk of a downturn, the bank said.

Analysts said this week’s rally in meme stocks, which saw companies like Opendoor, Kohl’s, and other so-called DORKs surge, is part of a historic short-squeeze that recalls similarly bullish moments like 2000 and 2021. The bank said that heavily shorted stocks beloved by retail traders have trounced the broader market in the last few months.

A basket of stocks popular with the retail crowd and another basket that tracks the most-shorted stocks have been up 50% and 60%, respectively, since April, compared to 28% for the broader S&P 500.

Goldman Sachs’ Speculative Trading Indicator — a gauge for how much trading activity is attributed to unprofitable stocks, penny stocks, or stocks with high valuations — spiked to its highest level since around 2021.

Despite the frothiness, it’s actually good news for near-term returns.

When the gauge shows a sharp increase over a three-month period, stocks have typically outperformed for the following twelve months.

However, the bank warned that the music eventually stops, and such wild bursts of euphoric trading actually raise the risk of a decline.

“The recent rise in speculative trading activity signals near-term upside risk for the broad equity market but also increases the risk of an eventual downturn,” the analysts wrote.

The meme stock rally this week has fanned concern among other market forecasters, though many say the broader market still appears healthy.

Michael Brown, a senior research strategist at Pepperstone, told Business Insider that stocks are still being propped up by a resilient US economy, strong corporate earnings, and optimism over President Donald Trump’s trade deals, though sentiment was approaching extreme levels.

Art Hogan, the chief market strategist at B. Riley Wealth Management, said he didn’t believe meme stocks were a symptom of a larger valuation problem in the market, calling the latest rally “more noise than it is a signal.”