Goldman Sachs top trader: Geopolitical risks are increasing uncertainty; it's still not too late to hedge!

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The S&P 500 Index has fallen 5% from its high, and the market is repricing hedging strategies. In a highly uncertain and low-conviction investment environment, Goldman Sachs’ top trader Louis Miller warns that targeted macro hedging should be a core portfolio allocation, not an option.

In his latest report, Miller pointed out that Goldman Sachs’ trading desk has observed a significant increase in hedging activities in recent weeks—last week, short positions in US-listed ETFs rose by 8.3% in a single week, the second-largest weekly increase in the past five years.

Meanwhile, flows in derivatives desks are exhibiting a pattern: “unwinding hedges during declines, and rebuilding positions when there is a rebound or volatility retreats,” suggesting that institutional investors are systematically managing tail risks.

In addition to hedging strategies, Miller also offered specific operational suggestions on the timing for returning to the AI theme, selection paths for physical asset (HALO) investment, and stress signals in the private credit market. The current triple overlay of geopolitical shocks, oil price volatility, and stagflation expectations is reshaping the risk-reward structure across asset classes.

Hedging Remains Urgent: How to Construct the Toolbox

In the US market, Miller’s recommended mainstream index hedging tools include S&P 500 put options (SPX puts) and VIX call spreads. In Europe, Goldman Sachs’ asset allocation team suggests buying V2X call options while shorting put options on European industrial stocks.

On directional hedging, Miller favors shorting cyclical stocks, or establishing long exposure through Goldman Sachs’ geopolitical risk equity basket (GSXUGEOP) and oil factor hedge basket (GSPUOILY). The logic is that Goldman’s research department has raised its oil price forecast—model assumptions now consider a low-traffic state in the Strait of Hormuz lasting 21 days (previously 10 days), followed by a 30-day gradual recovery, thereby adjusting the post-shock Q4 2026 Brent/WTI forecast to $71/$67. In an extreme scenario, the average price of Brent crude in March could hit $140.

If high oil prices continue to suppress growth expectations and delay the Fed’s rate cut cycle, Goldman’s stagflation hedge basket (GSPUSTAG) will become a repositioning tool—going long commodity equities and defensive compounding assets, while shorting low-quality consumer, semiconductor hardware, and unprofitable tech companies. Goldman economists have postponed the expected first rate cut from June to September, but their probability-weighted path remains more dovish than the market’s expectations.

Private Credit: Redemption Pressure Mounts, Valuations Still Have Room to Fall

Risk signals in the private credit market are accumulating. According to Goldman’s research, the subscription scale of alternative asset management companies with March data disclosed has fallen by more than 50% compared to the average monthly level in 2025, and alongside redemption rates in the high single digits, the industry is expected to see net outflows in coming quarters.

Miller points out that about 80% of assets in direct lending are held in long-duration lock-up funds, SMAs, and publicly traded BDCs, with no immediate redemption mechanism, so the systemic risk of large-scale concentrated redemptions is relatively controllable. However, negative sentiment toward software exposure and the narrative of AI disruption are raising redemption requests and will drag down recent management fee income and wealth growth prospects for US BDCs (GSFINBDC) and alternative asset managers (GSFINALT).

On valuation, even though the private credit baskets have seen a pullback since the start of the year, Miller believes this does not yet make the sector attractive—after deducting after-tax returns related to equity incentives, most targets are still trading at multiples in the mid-to-high teens. Should forced de-leveraging occur, there is still room for further valuation compression. In addition, Miller has launched a European financial private credit exposure basket (GSXEFINC), covering European alternative asset managers, insurance companies, and wholesale banks with private credit exposure.

AI Theme: The Infrastructure Layer Remains the Optimal Solution

Although the current market focus is on geopolitics, Miller believes the AI disruption narrative is highly likely to persist over the next 12 months, and that sector-level diffusion and company-level differentiation will make it difficult for the market to stabilize before clear fundamental data refutes the narrative.

Within Goldman’s covered AI theme baskets, the infrastructure layer continues to attract the most capital: the data center basket (GSTMTDAT) is up 26% year to date, the power grid upgrade basket (GSXUGRID) is up 22%. The US and global memory baskets (GSTMTMEM, GSXGMEMO), although off about 10% from their year highs, are seen by Miller as a good buy-on-dip opportunity.

Goldman research expects that strong demand for server-related applications and limited capacity expansion will result in a continued supply shortage in the global memory market (DRAM, NAND, HBM) from 2026-2027, and has raised target prices for Samsung Electronics and SK Hynix, expecting "unprecedented operating profit margin levels in a traditional memory upcycle" in coming quarters.

HALO Investments: Physical Assets Must Be Carefully Selected

Following an accelerated AI disruption narrative and rising stagflation expectations, trading in physical assets is no longer cheap—the P/E premium between capital-intensive and capital-light industries has already emerged. Miller suggests differentiated allocation under the HALO framework, focusing on three main directions.

First, physical assets with an AI angle—robots. Miller believes the robotics theme will draw more attention. There have been many sector catalysts recently: NVDA and ABB announced AI-powered industrial robot cooperation, Alphabet’s Intrinsic was integrated into Google to expand smart robotics, and Qualcomm formed a long-term partnership with German startup NEURA Robotics to accelerate humanoid robot commercialization. The Goldman global robotics basket (GSXGROBO) covers global stocks in the robot supply chain (excluding China), and there is also a China A-share version (GSXGBOTZ).

Second, physical assets that offer stagflation protection—Brazil. Goldman’s economists have raised Brazil’s 2026 GDP forecast by 20bps to 2.0%, and expect the Brazilian central bank (Copom) to start a gradual rate cut cycle, with policy rates reaching 12.5% by end-2026. The Brazilian stock market is most negatively correlated with local rates among emerging markets, so easing rates will support equities. Goldman’s Brazil rate-sensitive basket (GSBZRATE) offers relevant exposure.

Third, physical assets supported by industrial policy—defense and energy security. Across Asia, energy supply strains from Middle East conflicts are putting nuclear energy (GSXANUCP) back in the spotlight—Korea, China, and Japan all have nuclear restarts or new builds underway. In Europe, renewed energy shocks have exposed the region’s vulnerabilities, with the EU Commission updating its clean energy strategy and pushing for deployment of small modular reactors. Goldman’s European power basket (GSXEPOWR) is seen as a key beneficiary.

Risk Warning and DisclaimerThe market has risks, and investments should be made with caution. This article does not constitute personal investment advice, nor does it take into consideration an individual user’s particular investment objectives, financial situation or needs. Users should consider whether any opinions, views, or conclusions in this article are appropriate for their specific circumstances. Investing based on this content is at your own risk. ```