Goldman Sachs Head of Hedge Fund Business: No confidence in either "long" or "short," but the full test for the stock market has not yet arrived.
Goldman Sachs believes that although the market has experienced volatility, it has not yet triggered a true risk repricing.
This week, Tony Pasquariello, the head of Goldman Sachs' hedge fund business, emphasized in his latest weekly market observation, while various market risk indicators appear to remain under control, potential downside shocks have not yet been fully unleashed. Compared to historical bouts of market volatility, stock traders have not truly been tested during this adjustment.
Pasquariello believes the current market situation is best summarized by Arnold Ventures Co-Chair John Arnold’s words posted on social media:
The charm of the commodities market lies in the fact that, in the end, what matters is not who says what, but supply and demand itself.
Additionally, Pasquariello pointed out that Goldman Sachs data show clients’ scale of reduction in March was the largest in 13 years, and entering April, the market as a whole held a sizable net short position.
Even so, he clearly advises: The current top priority is to preserve capital and wait for the next clear entry signal. He stated:
The opportunity to make big money in a crisis usually comes after the crisis.
Risk premium is mild, but the "worst moment" may still lie ahead
Pasquariello highlighted that, based on multiple quantitative indicators, the "intensity" of this market turmoil is less than expected.
Forward volatility, the relative performance of cyclical stocks versus defensive stocks, and investment-grade credit spreads have not widened to levels seen in previous crises.
Pasquariello said:
I'm not saying March wasn't volatile. What I mean is, stock traders haven't truly faced a comprehensive test yet.
Regarding the current resilience of the market, Pasquariello outlined two opposing interpretations.
The optimists believe the market has not lost confidence in the sustainability of US economic growth.
Goldman Sachs strategist Ben Snider's data support this: S&P 500’s expected earnings per share for the next 12 months have been raised by 6% from the high, up 3% since the conflict started, and the continued improvement in earnings expectations provides fundamental support for the market.
The pessimists, on the other hand, consider the market overly complacent, and believe the real shock is yet to come.
Goldman Sachs’ Tony Kim notes that the last batch of oil tankers passing through the Strait of Hormuz in late February have just arrived at their destinations in East Asia and Western Europe. The impact of physical energy shortages is just beginning to ferment, and the most explosive convexity point in the upward move of energy prices has not yet been released.
Pasquariello admits he does not fully embrace either the bullish or bearish view. This week, the S&P 500 saw a strong rebound despite rising oil prices, which itself reflects deep contradictions within the market.
Impact of physical energy shortage may soon emerge
Beyond subjective judgment, Pasquariello cited Goldman Sachs’ own business data.
Goldman Sachs’ prime brokerage data show that March saw the largest scale of sales by hedge fund clients in nearly 13 years. This means the trading community greatly reduced long exposure in March and entered April carrying substantial short positions.
Pasquariello believes that, although this data cannot guarantee any directional conclusion and only represents certain types of market participants, it shows the tactical risk-reward structure is now more balanced than a month ago.
He attributes today’s core contradiction to: The market is facing the largest oil supply disruption in history, yet a single major headline could trigger a fierce short squeeze. He calls this state "strategic ambiguity."
At the volatility level, Pasquariello thinks that even though the VIX has peaked, both upside and downside tail risks are simultaneously present:
On one hand, if the crisis continues to evolve into an all-out economic growth shock, downside risk cannot be underestimated;On the other hand, if a diplomatic or policy breakthrough occurs, upside tail risks should not be ignored.
Based on this, he maintains a conservative stance, stressing that the priority now is to preserve capital and prepare for the next round of opportunities.
Preserve capital first, wait for post-crisis entry window
Looking ahead, Pasquariello expects three major themes will continue to dominate the market after risk subsides:
First, the AI investment boom will not fade. Identifying direction is easy, execution is harder. Pasquariello says he will stick with the paired trade strategy of AI leaders versus laggards.
Second, the demand for electricity and infrastructure financing will exceed previous expectations. A similar pattern to 2022 re-emerges, as the structural costs of insufficient long-term investment in basic industries and a lack of supply chain diversification are materializing, and the strategic value of energy infrastructure will become more prominent.
Third, the resilience of the Japanese stock market deserves attention. Japanese equities are both cyclical assets, highly reliant on energy imports, and widely overweighted by traders. Despite multiple adverse factors, performance over the past month has been impressive. Pasquariello believes the capital inflows into Japan driven by AI and defense themes will continue in the next stage.
Ending with Darwin’s theory of evolution, Pasquariello summed up this week’s market observations:
The ones who survive are not the strongest, nor the smartest, but those most able to adapt to change.
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