Goldman Sachs's top trader and hedge fund research head Tony Pasquariello said the dominant narrative fluctuations in the market have been significant in recent months, and his basic stance has not changed: to minimize the risk of asset quality as much as possible, and to "remain vigilant in the noise of the coming month."

Pasquariello mentioned that the dominant narrative fluctuations in recent months include: explosive rise of tech stocks in July, initial impact of value at risk (VAR) in early August, aggressive move by the People's Bank of China in September, stock market fluctuations after the Fed interest rate cut in September, with Nvidia rising by 4% and small-cap stock index Russell 2000 falling by 1%. He said there is nothing extraordinary about this, but it is clearly indicative of a potential pattern: this is a trader's market, with risk/reward being uncertain for the past three months, yet the S&P 500 index continues to modestly hit new highs.

Pasquariello believes that this is essentially in line with the downside tail, with the downside tail weakened by rate cuts and prolonged economic uncertainties, while the upside tail is constrained by recent political and geopolitical uncertainties. Capital flows favor the bulls, and price trends indicate that this is a market that continues to be bought into.

Pasquariello mentioned some key market variables as follows.

US economic growth

Pasquariello believes that there has been almost no progress in this area this week, but he emphasizes that Goldman Sachs' US economic surprise index is at its highest level in the past six months.

Wall Street News mentioned earlier this week that the non-farm payroll released last Friday exceeded expectations by a large margin, causing concerns about rising inflation and the tightening of the Fed's monetary policy to resurface. After mixed signals appeared, Wall Street once again began to discuss whether 'good news is really good news,' and the argument that the US economy will not experience a 'hard landing' has resurfaced.

Pasquariello pointed out that the performance of the Goldman Sachs index mentioned above broadly aligns with the 'no hard landing' view, also reflected in Goldman Sachs' forecasts for US GDP growth: growth of 3.2% in the third quarter this year, 2.1% in the fourth quarter, and 2.8% for the whole year.

The Bank of Japan will raise interest rates next time?

After the heavy losses in the US bond market last week, the interest rate detachment that Goldman Sachs received more or less reflects the 25 basis point rate cuts at the Federal Reserve's FOMC meetings in November and December, which is consistent with Goldman Sachs' baseline forecast, and probably also the Fed's baseline forecast.

Therefore, stock operators can still imagine that the Fed will have an orderly adjustment of the rate cut curve, which is different from a substantial rate cut – Pasquariello also believes that this is enough to support the main trend.

Capital Flows / Positions

Specifically in the US, there have been no major changes in capital flows recently. However, there are evidently some persistent demands within the market (this is the natural law of things).

Looking ahead, what worries Pasquariello is that the trading sector, including hedge funds and US households, is currently under tremendous pressure. In fact, November and December are the best two months of the year for share buybacks.

American consumers

On the one hand, the employment report is undoubtedly good news for American consumers; on the other hand, the fluctuation of micro data points usually accompanies a decline in stock prices. Pasquariello also acknowledges this tense relationship:

This makes him feel that he may be more inclined to be optimistic about American consumption in the large cap market rather than just focusing on non-essential consumer categories. However, I still like the risk/return profile of the s&p 500 non-essential consumer sector (S5COND ).

USA technology

Pasquariello mentioned two key things. One is the fund flow: hedge funds sold off technology stocks for five consecutive months, then bought heavily last week, and this week bought individual technology stocks and index futures at a faster pace.

Another thing to consider is the price movements of Nvidia compared to Amazon or Microsoft, showing significant dispersion within the technology sector. Therefore, the Nasdaq 100 index is only 2% below its high. And we are about to enter the critical third quarter earnings season.

USA small cap stocks

The Federal Reserve has been actively weakening economic growth, while China is stimulating its economy, yet American small cap stocks are not performing well.

Pasquariello believes that the market is clearly showing its strength here - and there are even better choices.

US Presidential Election.

Pasquariello said that he knows many well-informed people have strong beliefs about the election results, with significant differences, and he firmly believes: like flipping a coin on November 5th.

In this situation, he is curious about how much risk premium will be released after the election. If we observe the term structure of the S&P volatility, we will find that this tense situation may persist until the election results are clear.

Japan

Currently, there is no international capital inflow into Japan, investors have become cautious after the volatility shock in August, and it seems there have been better investment choices since then, but this week Japan's stock market performance still slightly outshines.

Pasquariello still favors core themes with strong performance - especially share buyback baskets and defensive stocks, while avoiding large directional calls on major indices.

Net zero carbon emissions delayed

Pasquariello mentioned that he saw a report proposing to delay the expected time to achieve net zero carbon emissions, which he found to be the most interesting report he read this week. The report states that it has updated the net zero carbon emissions expectation path launched in June 2021, reflecting an increase in carbon emissions and coal usage since the energy crisis in 2022. The report now believes that the lifespan of hydrocarbon assets is longer, the peak oil demand will occur after 2030, and the demand for natural gas as a transitional fuel will increase until 2050.

Finally, Pasquariello mentioned a highlight he saw this week, suggesting that compared to other options, the United States' extravagant spending may not necessarily be a bad policy. The United States has been overspending for decades, but the private sector continues to expand, innovate, and create globally leading companies in terms of market capitalization. Therefore, the United States should subsidize the upcoming retiring baby boomer generation, rebuild the global supply chain with reliable allies, and invest heavily in the life-and-death AI competition. If this plan doesn't fail, that's good, but if it fails, it would be a disaster.