Goldman Sachs Hedge Fund Chief: AI is "driving the market again and again," controversies are escalating, but "don’t fight the bull market, and don’t chase it either."
```
Author: Bao Yilong
Source: Hard AI
Goldman Sachs’ hedge fund chief emphasizes that US stocks are still in a bull market, but warns not to blindly chase the rally at current highs.
On September 11, Goldman Sachs hedge fund chief Tony Pasquariello stated in a research report that the current AI-driven US tech giants and loose monetary and fiscal policy are the two main pillars supporting the bull market. However, record-high valuations and weakened short-term capital inflows indicate that the market needs to “consolidate and stabilize” in the short term.
Tony Pasquariello emphasizes the need for investors to be patient, not to go against the bull market, but also not to chase the rally at these highs. In the short term, consider using low-cost options for hedging and be prepared for the next wave of gains that may arrive in the fourth quarter.
Macroeconomics and Corporate Profits: Resilience Over Grand Narratives
The report first analyzes the two fundamental factors driving the market: economic growth and corporate profits.
In terms of economic growth, Goldman Sachs predicts that US GDP growth will slow to 1.3% in 2025, well below recent years’ levels, especially as the labor market is running in a “stall state.”
However, they expect the economy to return to trend growth rates of 1.8% and 2.1% in 2026 and 2027, respectively.
More importantly, the report stresses that loose financial conditions, strong fiscal support, deregulation, and the capital expenditure boom in the artificial intelligence (AI) sector all bring significant upside potential to economic growth.
In terms of corporate profits, despite uncertainties such as tariffs, Goldman Sachs expects S&P 500 earnings per share (EPS) to achieve solid 7% growth both this year and next, reaching $262 and $280, respectively.
The report especially points out the marked contrast between strong corporate profit performance and the pessimistic macro narrative.
In the first half of 2025, in an environment where CEOs generally feel uncertain, the “S&P 493” (S&P index constituents excluding the Magnificent Seven) saw profit growth of 7% year-over-year, while the earnings growth of the seven tech giants reached a staggering 28%. This shows that, at the corporate level, profit-making ability is a solid foundation supporting the market.
Valuations and Capital Flows: Short-term Alarm Sounded
Goldman Sachs’ hedge fund chief points out two factors issuing short-term warnings for US stocks: market valuation and capital flows.
In terms of valuation, the S&P 500’s current forward 12-month P/E ratio has reached 22x, ranking in the 96th percentile since 1980.
The report bluntly states this is a “demanding” valuation, with higher and more sustained levels only seen during the late 1990s tech bubble in his market career.
However, the report adds that high valuations are more of a “road sign” for future returns than a short-term sell signal; persistent high valuations over the past three years have not prevented the market from rising substantially.
In terms of capital flows, the technical buying momentum that supported the market in the summer is dwindling.
Systematic trading funds’ positions are already “quite saturated,” and stock buybacks will also be restricted in the coming months. This means that, in the short term, liquidity will no longer be the main driver of the market.
The report suggests closely monitoring US retail investors’ moves after October, as they have been a major force of buying in the market.
Three Key Variables: The Fed, AI, and the Law of Large Numbers
In addition to the fundamentals above, the report also highlights three swing factors that may have a significant impact on the market.
First is the Fed’s rate-cutting cycle.
Goldman Sachs’ economics team and interest rate markets generally expect about five rate cuts by the Fed between now and mid-2026. Combining expectations of rate cuts with prospects for an economic rebound, history suggests this is extremely favorable for the S&P 500. The report’s view:
Don’t fight the Fed, especially when there is no recession.
Although much of the benefit may already be priced in, it remains a powerful force not to be ignored.
Second is the major swing factor: AI.
Since the end of 2022, AI has repeatedly propelled the market forward. The debate over AI is getting more intense: one side believes we are still in the early stages of a new world’s “second inning”; the other side thinks this is the biggest “capital misallocation” since the tech bubble.
The report believes that this narrative swing will continue. But unless there is a recession or external shock, large companies’ cyclical spending impetus on AI will remain “very, very strong.”
Finally, there is the challenge of the “law of large numbers.”
The report acknowledges that US large tech stocks have performed exceptionally for a long time, with unrivaled capital generation, returns, and profit growth. However, from today’s starting point, the real question is “whether the most explosive days are already behind us.”
Taking Nvidia as an example—when its earnings forecasts were raised by over 100% in 2023 and 2024, its stock price tripled. Now, with its forward 12-month earnings forecast rising about 30% year-to-date, the stock has “only” correspondingly increased 28%.
While this is still outstanding, it also reflects the challenge of maintaining high-speed growth at such a massive scale.
This article comes from WeChat Public Account “Hard AI”, for more cutting-edge AI information click here
Risk Warning and DisclaimerThe market involves risks, and investments require caution. This article does not constitute personal investment advice, nor does it take into account the individual investment objectives, financial conditions, or needs of any particular user. Users should consider whether any opinions, views, or conclusions in this article are suitable for their specific circumstances. Investing accordingly is at your own risk. ```