Goldman Sachs hedge fund head: "Zero-day options" suppress US stock volatility; technology and energy remain the best choices.

US stocks are currently in a tug-of-war between bulls and bears, while an implicit force from the options market is locking the S&P 500 index's intraday fluctuations within an unusually narrow range.

In his latest market macro report, Goldman Sachs' head of hedge fund operations, Tony Pasquariello, warned that "the current market is not easy." He pointed out that the stock market is stuck in a stalemate, weighed down by rising oil prices and interest rates on the one hand, and supported by corporate earnings growth on the other. Meanwhile, Goldman Sachs economist David Mericle has included a 25-basis-point rate hike in his forecast for the September Federal Reserve meeting, although he himself believes that the current economic situation does not provide a strong reason for a rate hike.

At the market structure level, Goldman Sachs derivatives strategist Brian Garrett pointed out that volatility harvesting strategies, exemplified by "zero-day expiration options" (0-DTE), are massive in scale. In the absence of intraday catalysts, these strategies force the market into a narrower trading range. Despite high macroeconomic uncertainty, Pasquariello maintains a dual bullish stance on the energy and technology sectors and identifies US fiscal sustainability as the biggest long-term risk to US stocks.

Zero-date rights to manufacture "27-day corsets"

To Pasquariello's surprise, the S&P 500's intraday trading range has remained below 1% for the past 27 trading days—the longest period of low volatility since the outbreak of the COVID-19 pandemic.

Brian Garrett offered a structural explanation: "This reflects the current market structure. Low trading volume and a relative lack of significant news have led to the options market playing a more significant role in intraday trading. The 'profit' strategy with 0-DTEs is huge in the S&P options market, and these strategies begin operating as early as 9:30 am, forcing the market into a narrower trading range in the absence of intraday catalysts."

Pasquariello summarizes this phenomenon as follows: zero-day options can "tether" intraday price fluctuations to some extent, but this suppression is not effective indefinitely. Once a major catalyst appears, the compressed volatility energy will be released in a concentrated manner.

Expectations of a Federal Reserve rate hike are rising, but doubts remain about the economic fundamentals.

At the macro level, Goldman Sachs chief economist David Mericle has included a 25-basis-point rate hike at the September Federal Reserve meeting in his baseline forecast scenario, but he has also made it clear that this rate hike decision lacks strong economic justification.

Mericle believes that the portion of inflation exceeding the 2% target can be attributed to one-off factors, the effects of which are expected to gradually fade. The core PCE inflation rate falling to around 2.5% over the past three months is an early sign of this assessment. He also points out that the seemingly widespread inflation is mainly due to the tariff effect, rather than economic overheating, and that inflation expectations are not currently facing an imminent risk of decoupling.

Ben Snider, head of Goldman Sachs' US portfolio strategy team, analyzed the historical performance of US stocks during the past seven interest rate hike cycles: in the first three months after a rate hike began, the S&P 500 fell by an average of 2%; however, it rebounded by an average of 9% in the following 12 months. The only major exception was the sharp correction in 2022. Snider's research also shows that the two best-performing sectors in the early stages of a rate hike were technology and energy.

Technology and Energy: Goldman Sachs' Core Pairing It Doesn't Want to Give Up

In its report, Pasquariello emphasized that 2026 was an exceptional year, with each week feeling like an independent adventure, and the momentum factor experiencing a series of dramatic fluctuations. However, amidst all this, a combination of long positions in energy (up 44% year-to-date) and long positions in technology (up 23% year-to-date) continued to generate returns.

Regarding the future of technology, another Goldman Sachs analyst, Rich Privorotsky, quoted industry leaders as saying, "Those at the forefront of technology tell you that the pace of technological progress is so astonishing that they need to proactively slow down. This in itself is a huge endorsement of the technology. Security and alignment issues do exist, and resolving these issues is crucial—the message 'this thing really works' is already embedded in this warning."

Pasquariello stated that, given the current macroeconomic dynamics, he is not inclined to abandon the two paired strategies: energy plus technology, and global interest rate bulls and equity bulls.

Positions are biased towards defense, and market sentiment has fallen to its lowest point this year.

According to Goldman Sachs' prime brokerage books, the current net exposure is at the 26th percentile over the past year, and last week's net selling of macro products saw the largest weekly decline since "Liberation Day".

Goldman Sachs' sentiment indicator for its US portfolio strategy is currently reading -0.5 standard deviations, the lowest since March of this year, and at the 26th percentile over the past decade.

Pasquariello stated that he understands why active investors choose to reduce their risk exposure during historically weaker seasonal periods, and he is aware that systematic funds may be forced to further reduce their positions as prices decline. However, he still expects the market to complete the necessary adjustments in September and October, laying a solid technical foundation for the market in the final two months of the year.

Fiscal sustainability is the biggest long-term risk for US stocks.

In its report, Pasquariello listed the sustainability of U.S. fiscal policy as the biggest long-term risk to U.S. stocks, stating bluntly that this issue could ultimately lead to significant tax increases or persistently high interest rates, neither of which would be beneficial for stock investors.

He also noted that the Bloomberg Commodity Index (BCOM), despite facing seasonal headwinds, has recently broken through its 2022 high, a signal that warrants attention.

According to Pasquariello, the current market is "building momentum with relatively light positions, heading towards a catalyst week that the market has been refusing to price in for a month." Zero-day options can temporarily suppress intraday volatility, but this suppression will eventually have its limits.

Risk warning and disclaimerInvesting involves risk; please exercise caution. This article does not constitute personal investment advice and does not take into account the specific investment objectives, financial situation, or needs of individual users. Users should consider whether any opinions, views, or conclusions in this article are suitable for their specific circumstances. Any investment decisions made based on this information are at your own risk.