U.S. stocks are being tossed around by Trump-related news! Goldman Sachs: The economy has support, but don't chase rallies—buy the dip.

After market turbulence triggered by news related to Trump, Tony Pasquariello, head of Goldman Sachs Hedge Fund Coverage, offered a clear assessment: Despite heightened short-term volatility and crowded investor positions, solid US economic fundamentals and liquidity support from the Federal Reserve make the macro outlook "essentially favorable" for stocks. Strategically, this year investors should focus on buying on dips rather than chasing rallies.

Since January, market sentiment has undergone a dramatic shift from excitement to anxiety. Although the S&P 500’s volatility was just 6% at the start of the year, and the bond market's MOVE index dropped to multi-year lows, the mood has clearly changed this week. Repeated tariff-related headlines and Japanese bond market turmoil have reignited volatility from extremely low levels.

Investor position congestion has narrowed room for risk management. Whether retail or institutional, individual stocks or index futures, almost all position indicators are at recent historical highs. At the same time, the American Association of Individual Investors (AAII) sentiment survey shows investor optimism is at its highest since November 2024.

But Pasquariello stressed that the core logic should not be ignored: US economic growth is accelerating, and the Federal Reserve is supplying more liquidity. This combination is the key macro driver for equities in the medium term. He maintains a "cautiously bullish" stance, believing that the current risk-reward is tricky, but at better entry levels, macro conditions will continue to support stocks.

Market Shifts from Extreme Calm to Volatility

January this year has become a textbook case of rapid market change. Until last Friday, major global assets were unusually stable in the New Year. S&P 500 volatility was only 6%, and the bond market’s MOVE index had slid to multi-year lows.

But the situation reversed rapidly. Pasquariello pointed out that the pace of technological and geopolitical change is "clearly stunning", with multiple forces moving quickly to produce tension and cross effects. Financial assets have essentially become a public referendum on major issues. The market now feels different, and tail risks seem wider.

Two Key Risk Factors Gain Attention

Among current risk factors, Pasquariello is more focused on the persistent impact of Japanese government bond market turmoil. Citing client observations, he noted that although the US Treasury market faced ups and downs last year, it remained notably stable and served as a ballast for risk assets. Data show that at the end of last year’s quarters, the US 10-year Treasury yields were: Q1 4.21%, Q2 4.23%, Q3 4.15%, Q4 4.17%.

He reminds equity traders to pay close attention to global fixed income markets, and to embed expectations of a steeper yield curve and higher term premiums into equity risk exposure. Additionally, the "headline roulette" surrounding tariffs has returned, bringing new uncertainty for the market to digest.

Investor Positions at Historical Highs

Position-related risks deserve caution. Pasquariello pointed out that recent trading groups—including retail and professional investors—have increased risk exposure significantly. Almost all indicators he tracks, whether individual stocks or index futures, gross or net exposures, are near the upper bounds of recent historic ranges.

Multiple sentiment surveys show investors in optimistic territory, with the AAII sentiment indicator at its most bullish since November 2024. Pasquariello commented that these factors aren’t "reasons to run," but do create a tactical environment with little margin for error. At least in the very short term, he would not be surprised by more market risk transfer.

Economic Fundamentals Provide Support

Despite multiple short-term disruptions, Pasquariello emphasized that core elements shouldn't be overlooked: US economic growth is trending upward and the Federal Reserve is increasing liquidity supply. This interaction is the key macro driver for equities in the medium term, distinct from daily noise and headline streams.

Last week, several data points performed strongly. The ISM Services Index rose to 54.4, the highest in over a year; initial jobless claims dropped to 198,000, a clearly healthy level; multiple housing activity indicators show signs of stabilization. Goldman Sachs’ US Current Activity Indicator has risen to levels not seen since late 2024.

Goldman Sachs economist Joseph Briggs holds a very positive view on the US economy’s outlook. He estimates that around $100 billion will flow back to households via tax refunds in the next three months, supporting near-term growth. On policy rates, given the new Fed Chair and expectations for core PCE to fall to 2.1%, rates could still be cut to 3%.

Strategy: Buy the Dip, Don't Chase Highs

Pasquariello summarized his stance as "cautiously bullish," acknowledging this carries a dilemma: When markets rise, "cautious" sounds conservative; when markets fall, "bullish" sounds aggressive. But he chooses to stick to this judgment.

In formal terms: The essentially favorable macro outlook should support US equities, but until better valuations appear, risk-reward remains tricky. He believes this year's tactical approach should focus on buying dips rather than chasing rallies.

The contradiction facing markets now is: On one hand, short-term disruptions like repetitive tariff news, global bond volatility, and crowded investor positions; on the other, medium-term positives such as US economic acceleration and improved liquidity. This requires tactical caution and strategic confidence from investors, seizing opportunities presented by market pullbacks.

Risk warning and disclaimerThe market carries risk and investment requires caution. This article does not constitute personal investment advice, nor does it take into account individual users’ specific investment objectives, financial circumstances, or needs. Users should consider whether any opinions, views, or conclusions in this article are suitable for their unique situation. Investing based on such information is at one’s own risk.