AI turmoil, geopolitical escalation... Panic is everywhere, but is private credit the most dangerous?

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Every corner of the market is sounding the alarm, but Goldman Sachs’ derivatives team believes the most worrisome risk doesn’t come from the sharp swings in tech stocks or the shocks caused by geopolitical conflicts, but from the quietly spreading cracks in credit.

Goldman Sachs derivatives trader Brian Garrett wrote in his latest weekend report that February “felt like a whole year”—the market shifted from volatility in individual stocks to instability at the index level, ultimately leading to the first "retreat" in the credit market: the CDX investment-grade credit spread widened by 5 basis points in a single week, the largest weekly gain since last summer, and open interest in credit ETF hedging positions surged to an all-time high. Garrett bluntly stated, “Of all these signals, the credit ‘retreat’ worries me the most.”

Meanwhile, pressures in the private credit market have begun to spill over into public markets. On Friday, the U.S. banking sector suffered its worst drop of the year, with the KBW Bank Index plunging as much as 6% intraday, marking the biggest single-day decline since last April’s trading turmoil.

Several private credit funds have experienced liquidity issues, and even Goldman Sachs had to send letters to investors to “prove its innocence,” attempting to calm market sentiment.

Panic signals are everywhere in the market, but retail investors remain calm

Garrett pointed out that signs of panic and contagion are “out in the open for all to see,” but retail investors seem completely oblivious—he mentioned in his report that nearly every day he hears competitors say “retail demand is at the 100th percentile for this time of year.”

Looking at specific indicators, the degree of market stress is not to be underestimated. Index skew remains at multi-year highs; the spread between implied volatility of individual stocks versus indices has risen to its highest level since the 2008 global financial crisis; open interest in credit ETF hedging positions has reached a historical record.

Garrett noted that a three-month -20% NDX put option is currently fully offsetting the cost of a three-month +10% call option, with Nasdaq’s one-month put/call skew approaching the steepest levels since the COVID outbreak. This provides a structurally attractive opportunity for investors seeking a rebound.

Hedge funds are accelerating their exit; technology and cyclical sectors bear the brunt

Goldman Sachs’ prime brokerage data shows U.S. stocks have seen net selling for the second consecutive week, and the pace is accelerating, with both long and short selling. The speed at which hedge funds are selling single U.S. stocks has reached its fastest since last April’s trading turmoil.

At the sector level, divergence is extremely apparent. The TMT sector—technology, media, and telecommunications—has seen net selling for the second week in a row, with heavy selling pressure especially in software, semiconductors, and semiconductor equipment. The Thursday after Nvidia’s earnings release intensified the sell-off. All U.S. cyclical sectors—energy, materials, industrials, financials, and real estate—experienced net selling, with deviation at -1.9 standard deviations from the five-year average.

In contrast, the healthcare sector saw net buying by hedge funds for the second week in a row, with long positions far outweighing short positions (about 3.5 to 1 ratio). Hedge funds’ overweight in healthcare stocks is more than 12 percentage points higher relative to the Russell 3000 Index, the highest in five years. Consumer staples is another sector with net buying this year, highlighting its defensive characteristics.

Credit cracks: Spreading from private to public markets

In this round of market turmoil, the most noteworthy transmission chain is taking shape. Garrett pointed out that previously, panic was limited to long/short books but has gradually spread to index levels and ultimately to the credit market. Historical data shows that the last time the CDX investment-grade spread traded in the 50-median range, the S&P 500 was about 1,500 points lower than current levels.

Pressure is particularly concentrated in the private credit market. According to a previous WallstreetCN article, several private credit funds have experienced liquidity problems, with credit risk and equity risk clearly decoupling in the past few days.

In response to market panic, Goldman Sachs sent out a detailed letter to investors on Thursday, endorsing its largest private credit fund oriented to retail investors. The letter showed Goldman Sachs Private Credit Corp’s exposure to enterprise software was about 15.5%, at the lower end of industry peers; the redemption rate in the fourth quarter was 3.5%, below the industry average.

Vivek Bantwal, global co-head of private credit at Goldman Sachs Asset Management, said in a follow-up Friday conference call that diversified funding sources allowed for ongoing capital deployment throughout the cycle. He also admitted, "If we go all-in on the retail channel, the pace of scale expansion will obviously be faster."

“Heavy assets, low obsolescence”: Goldman Sachs bets on a new narrative

In the midst of market turbulence, Garrett offered his own directional view and expressed agreement with the “HALO” investment logic—Heavy Assets, Low Obsolescence.

He cited a market viewpoint in his report: “For the past twenty years, investors have held to an assumption: light assets are better than heavy assets, software is better than shovels, code is better than copper wire, winners can expand infinitely at near-zero marginal cost... This logic is reversing, and it's reversing fast.”

Garrett believes the $740 billion capital expenditures expected in 2026 will inevitably find their way, with fundamental beneficiaries rising above the rest.

At the ETF level, demand for the equal-weight S&P 500 fund (RSP) remains robust. Garrett pointed out that many current portfolios hope to hold equity exposure while avoiding over-concentration in the “Magnificent Seven.” RSP’s assets under management have grown nearly 30% in the past three months, reaching about $90 billion, about twice the size of the Dow Jones Industrial Average ETF (DIA).

Risk warning and disclaimerThe market has risks; investment needs caution. This article is not personal investment advice and does not take into account individual users’ special investment objectives, financial situations, or needs. Users should consider whether any opinions, views or conclusions in this article are suitable for their circumstances. Investing based on this is at your own risk. ```