Goldman Sachs top trader and hedge fund research director Tony Pasquariello wrote a research report over the weekend reviewing the previous week's first rate cut by the Federal Reserve in four years, stating that the "Federal Reserve rate cut cycle has officially begun".

He pointed out that over the past forty years, after five rate cuts by the Federal Reserve, there was no subsequent economic recession. On average, the S&P 500 Index rose 17% in the 12 months following the first rate cut.

However, in the current rate cut cycle, with the strong 3% GDP growth in the United States, the Dow and S&P reaching historical highs, the current stock market, especially dominated by technology stocks in the Nasdaq 100, presents a "not very attractive risk/reward balance", and furthermore, the "margin for error is quite small":

"The current S&P index's PE ratio is twice the average starting point of the aforementioned five rate cut easing cycles which did not immediately lead to a recession.

Goldman Sachs expects the US GDP growth to be 2.8% this year, decrease to 2.3% in 2025, further dropping to 2% in 2026. In the backdrop of an inevitable economic slowdown, with stock market valuations soaring, leading to a relatively small margin for error, capital flow will be a key factor determining market direction.

This top trader still believes that the US stock market is in a bull market, the 'future trend is still upwards', but the risk/reward has been significantly reduced, 'the setup is very stringent, and the path will be unstable', however, the strategy of buying during significant market corrections in the past two years remains effective.

Specifically measuring the Sharpe Ratio, which balances excess returns against risk, the above research found that over the nine months from last October's bottom rebound to July's historical high this year, the Nasdaq 100 index Sharpe Ratio was close to 4.4. This means that for every unit of risk taken relative to the risk-free rate, there would be a 4.4 unit excess return. Now the Sharpe ratio has dropped to -0.4:

"As pointed out by Dominic Wilson, senior consultant of the Global Market Research Group at Goldman Sachs, the current period is very similar to the transition period from the first half of 2014 to the end of 2014/early 2015, as well as some experiences in 1996."

We are still in a bullish market environment, but in the next phase, the Sharpe ratio measuring investment returns will be much lower. In this context, I believe that betting on a single stock/sector/theme in the market can yield the highest returns.

Subsequently, the top Goldman Sachs trader outlined several major themes he is focusing on:

1. Capital Trends

Hedge funds have been reducing risks for two consecutive months, while U.S. long funds are the main buyers around the Federal Reserve rate cut week. Given the restrictions on corporate share buybacks next month, it is essential to consider what American households will do, and I believe they will buy U.S. stocks.

2. U.S. Technology Stocks

Over the past four months, market participants have significantly reduced their bullish bets on tech stocks, yet the performance of tech stocks continues to outperform the broader market. I believe the macro environment favors tech stocks, with very good cash flow dynamics. It is advisable to buy when next month's corporate earnings reports lead to a significant price pullback.

3. U.S. Consumers

The latest retail sales data in the USA indicates that American consumers will continue to resist the bear market, and now is the window period for non-essential stocks to outperform the large cap. At the same time, there is a general expectation that cyclical stocks will perform better than defensive stocks.

4. Stock indices outside the USA

Looking from a broader perspective, the Bank of Japan is moving against the rate cuts by major central banks in Europe and the USA, making Japanese assets seem self-contained, which may suppress foreign capital inflow, and the issue of potentially expanding inflation should not be ignored. So far this year, US stocks have easily outperformed European stocks again, with a total return twice that of the latter, seemingly contradicting market expectations at the beginning of the year.

In summary, this top Goldman Sachs trader is bullish on the American non-essential consumer sector outperforming the large cap and believes that American technology stocks will regain their structural advantage over bonds and defensive stocks.

Earlier news stated that after the significant 50 basis points rate cut by the Federal Reserve last week, according to Goldman Sachs' main broker weekly report as of September 20 last Friday, hedge funds bought US technology, media, and telecommunication stocks at the fastest pace in four months last week. After weeks of selling, although hedge funds have started to increase their holdings of technology stocks and have been buying for the third consecutive week, their overall position is still close to a five-year low.

Last Friday, Scott Rubner, a Goldman Sachs research fund flow expert who accurately predicted the correction in the US stock market at the end of summer, predicted the trend for the remaining three months of this year as follows: bearish by the end of the third quarter, a drop before the US presidential election in early November, and a rapid rise before the end of the year.

Editor/Lambor