Goldman Sachs: Market optimism masks recession risks, short-term strategies and liquidity may continue to drive US stocks higher.

Goldman Sachs macro trader Paolo Schiavone said that there is a 30% possibility of a US economic recession, which may sound like a warning signal, but global stock markets remain active because bets against the market momentum "almost seem irrational." Paolo Schiavone stated in a report, "The key point is that the market cannot see far enough. That is why it is overlooking the risk of recession." He believes that investors may be ignoring the potential slowdown in the labor market and instead focusing on ample liquidity, structural growth themes such as artificial intelligence, and financial credit expansion. In the backdrop where strong corporate earnings and bets on rate cuts are overshadowing concerns about the widespread impact of tariffs, the US stock market is nearing historic highs. Meanwhile, despite signals that economic growth may be slowing down, investors are continuing to flock to technology giants and artificial intelligence concept sectors. Derivatives traders currently anticipate that the Federal Reserve will cut rates by over 100 basis points by mid-2026. With a large issuance of short-term government bonds injecting liquidity into the money market, cash reserves are extremely abundant. At the same time, after rebounding from the sell-off triggered by tariffs in April, short-term funds have flooded into the market. Paolo Schiavone said that trend-following investors (CTAs) now control most of the "hot money" equity flow. This has led to signs of shortsightedness in the market, as "their single strategy of 'letting winners run' leaves very little room for fundamental shorts." He added that in a dominant short-term strategy with suppressed volatility, few are willing to short the still resilient uptrend, implying that the path of least resistance is still upwards.