"Ignore stocks, interest rates are the key": Goldman Sachs Delta-One trading desk warns, "The current risk/reward ratio feels very poor."

Goldman Sachs believes that the risk-reward attractiveness of US stocks has declined, and technical support cannot hide fundamental concerns. This week, Rich Privorotsky, head of Goldman Sachs’ Delta-One trading desk, issued a warning: While technical demand still provides support for the stock market, current valuations are worrying, the risk-reward ratio “feels bad,” and investors should use interest rates as the core benchmark for judging market direction. In his latest report, Privorotsky bluntly stated: Market pricing seems to imply optimistic expectations for negotiation results, with the market anticipating an agreement over the weekend, but may wake up disappointed on Monday. US-Iran negotiations are set to formally begin on the 10th, but disagreements over Lebanon have become a short-term obstacle to normalizing shipping in the Strait of Hormuz. Wallstreetcn mentions that US Vice President Vance stated that ceasefire conditions between the US and Iran do not include Lebanon, and the US has never made a commitment regarding it. Israel also emphasized that military action against Hezbollah in Lebanon does not apply to the current ceasefire agreement. Privorotsky believes that the passage issue in the Strait of Hormuz will be difficult to resolve in the short term. As long as negotiations continue, Iran has no incentive to allow oil flows to return to normal, because control of the strait is its only bargaining chip. Privorotsky thinks that the US stock market currently has not fully priced in these risks, but the oil market has already reacted—Brent crude oil futures for December 26 have rebounded above yesterday’s closing price. In addition, inflation has quietly accumulated even before the energy shock, and the upcoming CPI data release on Friday presents a key risk point. Privorotsky bluntly stated: Forget about stocks, interest rates are the North Star. Ceasefire remains fragile, and the Strait of Hormuz is the greatest variable Privorotsky pointed out that the lack of consensus on the Lebanon issue has become a short-term obstacle for transit through the Strait of Hormuz. Judging from the reaction of the stock market, the market has not yet regarded this as a major threat, but the key concern is how far apart the two sides really are and whether there is a genuine common ground. He emphasized that the US has a strong willingness and necessity to withdraw, but Iran’s core bargaining chip precisely lies in its control over the Strait of Hormuz. Privorotsky commented: As long as negotiations are ongoing, we can’t expect them to allow oil flows to normalize, otherwise, it would be akin to disarming themselves. He added: If Iranian toll stations become part of the long-term solution to this conflict, it would mark a permanent structural shift in oil distribution patterns. Interest rates are the core variable When interpreting market signals, Privorotsky is clear: For now, ignore stocks; interest rates are the true guide. He pointed out that this has never been that “oil prices surge to $200, central banks are forced into aggressive rate hikes” type of extreme tail risk, which remains unlikely. What the market is actually pricing in is that oil prices stabilize above expected levels, refined oil (diesel, gasoline, jet fuel) stays elevated, economic growth does not experience a catastrophic collapse, and inflation remains sticky. He stated that the Fed is currently at least constrained in its ability to cut rates, while in some European regions, rate hikes are back on the table. The highly anticipated US CPI data will be released on Friday. He noted that, even before the recent geopolitical shock, commodity-driven inflation pressures have been accumulating: commodities have been consistently tightening, gold is in high demand, and the logistics manager index shows visible inventories are at historic lows. Technical support and valuation challenges On capital flow, Privorotsky admits that technical forces are still providing support for the stock market. Currently, commodity trading advisors (CTAs) may still be buyers, short covering may reach record levels, and if volatility continues to compress, the market may maintain a relatively choppy pattern. However, he is clearly reserved about current valuation levels. He pointed out: I don’t like this position. The market seems to have returned to its pre-shock starting point—it feels absurd, just look at the Russell Index. Small-cap stocks—especially Russell index constituents—show marked pricing deviations, as these assets are highly sensitive to both interest rates and growth. He summarizes the current structure as: On one side is strong technical demand supporting the market, on the other is a price level and macro outlook for the second half that he does not endorse. He says: If volatility compresses far enough, I’ll consider expressing a bearish view via option structures. Consumption and AI: two diverging narratives On the consumption end, Privorotsky paints a rather negative picture. The US ISM prices paid index has risen to its highest level since June 2022; CPI is at risk of moving higher. Meanwhile, companies’ ability to pass on costs is limited, and private hiring rates have hit their lowest point since February 2010. US fiscal spending is very likely to shrink significantly in the second half (except for defense), and concerns are rising over AI’s effect on white-collar job replacement. He believes consumption has the least resilience in this rebound, but carries the most concentrated downside risks for the second half. The AI theme, however, provides a distinctly different narrative. Privorotsky predicts the market will pivot back toward AI and “investment economy” themes around Q1 earnings season. He notes, citing a Reuters report, that Anthropic’s latest model Mythos disclosed in a blog post that it identified “thousands of” critical vulnerabilities in widely-used core software (including Linux), such as operating systems and web browsers. Anthropic has paused rollouts and provided remediation opportunity to relevant agencies, but he is uneasy: What happens when similarly capable open-source systems emerge without such guardrails? In terms of trading direction, he judges that short-term token consumption is surging and that the AI hardware supply chain remains worth holding, but he remains cautious given the raw power and potential risks of the technology itself. Risk warning and disclaimer The market has risks; investment should be made with caution. This article does not constitute personal investment advice and does not take into account individual users’ unique investment goals, financial situations, or needs. Users should consider whether any opinions, views, or conclusions herein are suitable for their own circumstances. Investing based on this article is at your own risk.