US stock markets had a "chaotic week". Goldman Sachs hedge fund manager: many results have been revealed, but there are more questions than answers.
A senior executive at Goldman Sachs pointed out that while many events have settled down, what remains for investors are more questions than answers, making short-term risk-return ratios in the market particularly tricky.
For market participants, the past week was undoubtedly described as "tremendous in terms of information but also incredibly chaotic" by Tony Pasquariello, head of hedge fund business at Goldman Sachs. He believes that despite many key events settling, the market seems to have more questions than answers, making short-term risk-return unusually challenging.
Recent developments show that the market is struggling to digest multiple conflicting signals. On one hand, a new round of tariff fluctuations and a "clearly bad" non-farm payroll report have cast a shadow over the macroeconomic outlook, leading to a sharp drop in short-term treasury yields on Friday.
On the other hand, large US tech companies have delivered another strong quarterly earnings report, but the lackluster reaction in their stock prices suggests that the market has already priced in the positives extensively, and investors' expectations have become more stringent. Meanwhile, small-cap stocks faced their worst week since a critical period, with intense selling exacerbating market concerns.
These conflicting signals, combined with typical low liquidity in the summer market, paint a complex picture. Although long-term structural factors may still be optimistic, traders are facing a challenging trading environment in the short term.
Tech giants: Strong earnings cannot hide stock price fatigue
In the past week, the quarterly earnings reports of large US tech companies once again showed their strong profitability. According to Goldman Sachs' calculations, the "Tech Seven Giants" excluding Nvidia saw a 26% year-on-year earnings growth in the second quarter, while the rest of the S&P 500 index components saw only a 4% increase. However, such strong performance did not effectively boost stock prices. Pasquariello believes that this reflects that the market's pricing of tech stocks has entered a stage of "requiring higher standards".
In stark contrast to the strength of large-cap tech stocks, market breadth is severely lacking. The selling of small-cap stocks is particularly noteworthy, with the Russell 2000 index falling for five consecutive trading days, accumulating a 4% drop, marking its worst single week performance since the same period last year.
Pasquariello pointed out that the S&P 500 index's YTD return has been largely driven by a few stocks. This highly concentrated phenomenon, coupled with the weakness of small-cap stocks, paints a picture of poor market health.
Tariff impact: From "disruptive" to "disturbing"
The issue of tariffs has returned to the market's focus recently, with new tariff fluctuations adding new uncertainties to the market. However, Pasquariello observed that most market participants and business operators no longer see tariffs as the dominant variable in their decision-making. One client told him that tariffs are more "disruptive than destructive".
Despite this, the impact of tariffs is beginning to show in macroeconomic data. Goldman Sachs' team of economists predicts that based on announced measures, the average effective tariff rate in the US will increase by 9 percentage points by the end of this year and accumulate increases of 14 and 17 percentage points by the end of this year and next year respectively.
Goldman Sachs US economist Joseph Briggs expresses deeper concerns about this. He believes that although the market may have digested tariff expectations, the drag on economic growth and push on prices could become the focus of the market again in the coming months.
Reversal in fund flows, cooling of high leverage risks
For the past two months, healthy fund flows have been a key technical factor supporting the market. However, in the past week, fund flows have clearly shifted towards safety. Pasquariello stated that fund flows in Goldman Sachs' equity business division "clearly favor risk aversion," while consensus trades in the macro realm suffered heavy losses.
Looking ahead, the tailwind brought by fund flows is diminishing. The report predicts that as we enter August, speculative positions and retail investor demand may decrease. Although corporate buybacks may provide some support, overall, fund flows will transition from a "primary driver to a moderate driver".
A positive signal is that the previously worrisome high leverage risks in the market seem to be easing. According to data from Goldman Sachs' Prime Brokerage business (GS PB), the total market leverage level has seen the largest decline since June 2023 in the past two weeks. Pasquariello concluded that this indicates that the pressure surrounding high overall risk exposures is now being better controlled.
Global perspective: US stocks still have relative advantages
In the global asset allocation game, Pasquariello still favors US assets, especially tech stocks. He pointed out that although the market briefly sold off US assets in April, it proved to be a temporary phenomenon, as US tech stocks once again demonstrated their value during the second quarter earnings season.
In contrast, while European stock markets have performed well this year, even with a better return in USD terms, Pasquariello believes this is more of a "great trade" than a "structural story". He predicts that as the European Central Bank ends its easing cycle, US stocks will outperform Europe in the second half of 2025.
For the Chinese market, the report acknowledges its good returns this year, especially in the tech sector, with the Hang Seng Tech Index rising by 22% and reminding the world of its undeniable strength in the field of artificial intelligence. However, the report also points out that the market is still waiting for the "key element" of domestic consumption to be "fully unleashed".
Fed dilemma: risks of policy mistakes resurface
Interestingly, in Pasquariello's analysis framework, the Federal Reserve is only mentioned at the tenth point. He believes that despite many significant events in the past seven months, the Fed has remained inactive, making it difficult to say it is the determinant of stock prices.
Currently, the core issue facing the market is similar to a year ago: the risk of policy mistakes. As Federal Reserve Chairman Powell mentioned in April, the Fed may find itself in a "challenging scenario with conflicting dual mandate objectives" - rising core commodity inflation while the labor market significantly softens.
For traders, Pasquariello's final advice is to pay attention to the signals the market provides. He believes that short-term options have become an important tool for professional fund managers. His ultimate advice is, "If the options market in August gives you the opportunity to buy cheap gamma (volatility risk exposure), I would take it."
This article was originally published on Wall Street View, translated by GMTEight, edited by Chen Wenfang.
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