On Friday, the global stock market as a whole rose loudly: A-shares were red across the board, the Shanghai Composite Index closed up nearly 3%, the ChiNext Index rose nearly 8%, and the two major U.S. stock indicators, the S&P and the Dow, hit a record closing high. After last week's reminder to "stay vigilant in the hustle and bustle of the coming month," Tony Pasquariello, a top trader at Goldman Sachs and head of hedge fund research, warned investors that it was not time to bet all their chips All-in, suggesting that some "ammunition" for risky assets would be left behind after the United States election.
Pasquariello summarizes the current trading environment in this Friday's report:
- As U.S. stocks continue to move higher, the S&P has risen for six consecutive weeks by this week, the longest winning streak since the end of last year. It is worth mentioning that since October last year, the S&P has risen by 1,725 points, or 42%.
- This week, as the move progresses, we've seen some of the recent tensions ease: oil prices have retreated and implied volatility has eased.
- To be more precise, the S&P has experienced both gains and retracements this week, and it is more like a seesaw than a freight train going straight, but there is clearly still support for money flows. In this regard, Pasquariello reiterated that it is both a bull market and a market for traders.
- Discrete remains a bright and dazzling theme, and there's a lot of action behind the scenes at the moment. In Pasquariello's view, the most interesting thing is the recent movement of cyclical stocks relative to defensive stocks (see symbol GSPUCYDE).
- Although many smart people don't think so, Pasquariello still believes that the performance of United States consumers will counter the bearish rhetoric (as evidenced by retail sales and United States bank results).
- In markets outside the United States, some skepticism has permeated the narrative of Chinese stock market trading; European equities remain at a disadvantage over US equities, as some very high-profile corporate earnings have fallen short of expectations, which has had a noticeable impact on the pan-European stock index Stoxx 600 (with the only impressive exception being the power sector, see symbol GSXEPOWR).
- Gold is still on a very good trajectory, with the price of gold having risen above $2,700 this week, and Pasquariello says gold is an asset that can meet any expectations, and he certainly doesn't want to stir up a dispute over the underlying demand story.
- In stark contrast, if oil can't sustain buying in the current geopolitical environment, or against the backdrop of the United States reflation theme, then the market will show its cards.
- The US dollar has been in jeopardy this month, while the broader financial environment index has not tightened, which is a good thing.
Pasquariello mentions some of the factors he is particularly concerned about, with recent developments as follows:
1. China
There are two main questions to watch this week: what is the flow of news, and what is the flow of money. Regarding the former: the policy commentary continues to be steady, with a generally positive tone, but not much incremental shock. Regarding the latter, Pasquariello believes that Goldman Sachs' franchise flows are biased towards modest profit-taking, as the speculative community continues to cut the length of deals.
All in all, some doubts have crept into the market narrative, partly to reduce risk ahead of the United States election. Goldman Sachs raised its GDP forecasts for 2024 and 2025 after a press conference by the Chinese Ministry of Finance at the end of last week, and the People's Bank of China (PBOC) began to use swap facilities to support capital markets on Friday.
Based on the above findings, Pasquariello expects market turmoil by United States election day on November 5, after which all bets may be canceled, so he believes that this should still be a tradable rally, but he will control the situation, that is, options trading should be in the form of limited losses.
2. Money Flow/Position
One thing that struck Pasquariello in Goldman Sachs' recent franchise activity was that Goldman Sachs' prime brokerage business (PB) reported that the eight-week sell-off in U.S. stocks ended last week and continued to see buying (via macro products) this week.
In addition, some key market players – the systemic investment community and United States companies – are currently on hold. As a result, along with independent hedge funds, United States retail money has been the arbiter of price action (and will continue to bid after the election, barring trauma).
A side note: if it rebounds from the current base, market makers should chase higher prices given the current gamma dynamics in S&P options. All things being equal, all else being equal, the money flow story is still skewed in favor of the bulls.
3. Big Rotation – or not
From a more macro perspective, Goldman Sachs' United States Portfolio Strategy team did some research on the prospect of $950 million of money market assets entering the stock market. Their conclusion: don't get nervous, because the history of eight Fed rate cut cycles since 1984 shows that money usually flows into money market funds, not out, when the Fed initiates an easing cycle.
In addition, Pasquariello cautioned that United States households' allocation of cash is currently at a historic low of 15%.
If this reads a little too negative for U.S. stocks, don't despair, as Goldman Sachs expects corporate share buybacks of $1 trillion this year and next, Pasquariello said.
4. Earnings report
Banks like JPMorgan Chase & Co. got off to a strong start to the earnings season last week, and the tone for the week was even more mixed, with 47% of listed companies exceeding more than one standard deviation, which is in line with the long-term average but below recent trends.
In a series of earnings reports next week, Pasquariello believes that the threshold for earnings for blue-chip tech stocks in the third quarter is lower than in the first and second quarters of this year, relative to their own sector. This is partly due to a reduction in positioning, which is evident in the Goldman Sachs PB data, and partly due to lower formal earnings expectations.
Pasquariello quoted Ben Snider, a strategist at Goldman Sachs' U.S. equity portfolio strategy, as commenting that analysts' consensus data shows that the threshold is lower in the third quarter, with earnings per share (EPS) for blue-chip technology stocks expected to increase by about 40% year-on-year in the first quarter. Growth is expected to be around 30% in the second quarter, compared to about 20% in the third quarter.
5. United States technology stocks
When it comes to tech stocks, there has been some tug-of-war again this week, with Pasquariello admitting that tech stocks have underperformed this week compared to small-cap stocks.
Leading technology stock Nvidia closed at a record high on Monday, but since then global semiconductor stocks have tumbled, with ASML becoming the epicenter of a crashing earnings report, which happened against the backdrop of some big-name European companies being hit hard. Nvidia rebounded on Thursday with better-than-expected results and positive comments on AI, and tech stocks ended the week on a steady note.
6. United States interest rates
There was little flow on the United States side this week, but again skewed towards net positive, mainly from initial jobless claims and retail sales released on Thursday.
Looking at it more broadly, Pasquariello looked back to a conversation last week with Josh Schiffrin, head of global trading strategy at Goldman Sachs, and argued that apart from their general preference for higher interest rates (given the strong United States economic growth and China's stimulus), if anything, it is the continued vulnerability of the back-end (which tends to be the focus of market attention given deficit concerns).
Again, this only reinforces the preference for a steeper interest rate curve – which, in turn, supports the selection of stocks that contain such expectations (i.e., good for financial stocks, bad for stocks with duration or seen as bond stand-ins).
7. United States financial stocks
Pasquariello noted that last week, Goldman Sachs PB reported that demand for United States bank stocks hit a three-year high.
This was followed by continued demand in the banking sector this week, which has been bought for seven consecutive days. As mentioned above, a steeper United States interest rate curve should be positive for United States bank stocks (mainly through a higher net interest income (NII) channel; As Goldman Sachs financial industry analyst Ryan Nash points out, United States regional banks receive about 70% of their revenue through the NI).
8. Volatility
Pasquariello highlighted last week's observation that it is rare to see S&P implied volatility so high (and such a high bid bias) when the market makes higher highs.
To put this into numbers, John Marshall: Over the past 35 years, when the S&P hit new all-time highs, the VIX averaged 14.9.
While it's impossible to discern precisely what drives the gap between current prices and volatility, we may agree on common themes: politics, geopolitics, and corporate earnings. If there is any optimism, it is that a series of non-traumatic outcomes will unlock some of the risk premium.
According to Pasquariello, here are the best charts of the week. It maps earnings growth over the past 12 months, which could explain why he keeps a close eye on the outperformance of the fundamentals of United States blue-chip tech stocks.
Based on the above analysis, Pasquariello believes that the main theme is as follows:
- Given the friendly interaction inherent in United States economic growth and the Fed, his base case is positive.
- At the same time, risk/reward doesn't necessarily mean it's time to gamble (the S&P 500 hasn't shown as much upside convexity despite the policy front firing over the past month).
- As a result, Pasquariello will stick to its heavy United States holdings and reserve some risk units for post-election deployment.
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