This Friday, global stock markets are generally rising: A-shares are all rising, with the Shanghai Composite Index up nearly 3% and the ChiNext Price Index up nearly 8%. The two major stock indexes, S&P and Dow Jones, in the US are setting new record highs at the close. After warning last week to "stay vigilant in the noise of the next month," Goldman Sachs' top trader and hedge fund research director, Tony Pasquariello, warned investors again that it is not yet time to go all-in, hinting that it's best to hold some ammunition of risky assets until after the US election.

In his report this Friday, Pasquariello summed up the current trading environment.

• With the continuous rise of US stocks, as of this week, the S&P index has risen for six consecutive weeks, marking the longest rising streak since the end of last year. It is worth mentioning that since October last year, the S&P has risen by 1,725 points, a 42% increase.

• This week, as the trend progresses, we see some recent tensions easing: oil prices are falling, and implied volatility is easing.

• More accurately, the S&P index has experienced both gains and retracements this week, resembling more of a seesaw than a freight train on a straight track, but fund flows evidently continue to provide support. In this regard, Pasquariello reiterated that this is both a bull market and traders' market.

• Disruption remains a bright and dazzling theme, with many actions happening behind the scenes. According to Pasquariello, the most interesting aspect is the recent trend of cyclical stocks compared to defensive stocks (see code GSPUCYDE).

• While many smart individuals may think otherwise, Pasquariello still believes in the resilience of US consumers as evidenced by retail sales and the performance of Bank of America.

• Outside the USA markets, some doubt has already permeated the narrative of trading in the Chinese stock market; European stock markets are still in a weaker position compared to US stocks, as some very notable companies have not met profit expectations, significantly affecting the pan-European Stoxx 600 index (the only impressive exception being electrical utilities, see code GSXEPOWR).

• The trend of gold remains very strong, with the price of gold rising above $2700 this week. Pasquariello describes gold as an asset that can meet any expectations, and he certainly does not want to provoke any disputes in potential demand stories.

• In contrast, if oil cannot maintain buying pressure in the current geopolitical environment, or cannot sustain bid in the US inflation theme background, the market will show its hand.

• The US dollar has been in danger this month, while broader financial environment indicators have not tightened, which is a good thing.

Pasquariello mentioned that some factors he is particularly concerned about have recently made the following progress:

1. China

This week, observing two main issues: how the news flow is and how the fund flows are. Regarding the former: the policy commentary continues to be stable, with an overall positive tone, but without bringing too much incremental impact. As for the latter, Pasquariello believes that Goldman Sachs' franchise capital flow tends to moderate profit takings, as the speculator community continues to reduce trading lengths.

In conclusion, some doubts have quietly seeped into the market narrative, partly due to risk considerations being lowered before the US election. After the press conference from the Chinese Ministry of Finance last weekend, Goldman Sachs raised its GDP expectations for 2024 and 2025, and the People's Bank of China started using exchange facilitation tools to support the capital markets this Friday.

Based on the above findings, Pasquariello expects that the market will be volatile until November 5th, the day of the US presidential election, and all bets may be cancelled afterwards. Therefore, he believes this could still be a tradable rebound, but he will take control, and options trading should be in a limited loss format.

2. Fund flow / Position

In a recent proprietary trading activity at Goldman Sachs, one thing that impressed Pasquariello was that the trend of US stocks being sold for eight consecutive weeks ended last week, and buy orders continued this week (through macro products) according to the report from the prime brokerage (PB) business of Goldman Sachs.

In addition, some key market participants - namely, systematic investment institutions and American corporations, are currently inactive. Therefore, along with independent hedge funds, American retail funds have been arbitrators of price action (unless there is trauma, they will continue to bid after the elections).

An additional observation: if there is a rebound based on the current basis, given the gamma dynamics of the S&P options, market makers should chase higher prices. All in all, under the same conditions, the story of fund inflows still favors the long side.

3. Major Rotation - or Not

From a more macro perspective, the US investment portfolio strategy team at Goldman Sachs has done some research on the prospect of $0.95 billion entering the stock market from the money market assets. Their conclusion is: do not be nervous, because historical experiences of eight Fed rate-cut cycles since 1984 suggest that Fed easing cycles usually trigger capital inflows into the money market, rather than outflows.

Furthermore, Pasquariello points out that the allocation of cash by American households is currently at a historical low of 15%.

Pasquariello said, if these contents sound a bit too negative towards American stocks, please do not despair, Goldman Sachs expects corporate share buybacks to reach 1 trillion US dollars this year and next year.

4. Earnings on Financial Reports

Last week, banks like JPMorgan set a strong tone for the financial reporting season, this week's tone appears more mixed, with 47% of listed companies exceeding one or more standard deviations, consistent with the long-term average level but below recent trends.

In the upcoming series of financial reports next week, Pasquariello believes that blue-chip technology stocks will have slightly lower earnings thresholds in the third quarter compared to the first and second quarters of this year, relative to their respective sectors. Part of the reason is the reduction in positions, which is evident in Goldman Sachs PB data, and another part is the formal downward adjustment of profit expectations.

Pasquariello quoted the comments of Goldman Sachs portfolio strategist Ben Snider, stating that consensus data from analysts shows lower thresholds for the third quarter, with an estimated year-on-year increase in EPS of blue-chip technology stocks of about 40% in the first quarter, approximately 30% in the second quarter, and around 20% in the third quarter.

5. US Technology Stocks

Speaking of technology stocks, there have been some tug-of-wars again this week, Pasquariello admits that tech stocks performed poorly this week compared to small-cap stocks.

On Monday, leading tech stock Nvidia closed at a record high, but then global semiconductor stocks plunged, with ASML, which reported disappointing financial results, at the center, against the backdrop of some top European companies suffering heavy losses. TSMC announced better-than-expected performance on Thursday, as well as positive comments on AI, Nvidia rebounded on Thursday, and tech stocks ended the week on a stable note.

7. US interest rates

On the US front this week, the data flow is not abundant, but once again tends towards net positive values, mainly from the initial claims for unemployment benefits and retail sales announced on Thursday.

Taking a broader view, Pasquariello listened back to the conversation last week involving Josh Schiffrin, global trading strategist at Goldman Sachs, and noted that apart from the general tendency towards higher rates (given the strong US economic growth and China's stimulus measures), if there is any particularly prominent point, it's the continued fragility on the back-end (given deficit concerns, this often becomes the market's focal point).

Similarly, this will only strengthen the preference for a steeper rate curve — in turn, it also supports the selection of stocks that include this expectation (i.e., beneficial for financial stocks, unfavorable for stocks with duration or those seen as bond proxies).

8. American financial stocks

Pasquariello pointed out that last week, the Goldman Sachs PB report noted that demand for US bank stocks reached a new high in a full three years.

Following closely, the demand in the banking industry continues this week, having been bought for seven consecutive days. As mentioned, a steeper US interest rate curve should be favorable for US bank stocks (mainly through higher Net Interest Income (NII) channels; as pointed out by Goldman Sachs financial analyst Ryan Nash, US regional banks derive about 70% of their revenue through NII).

9. Volatility

Pasquariello emphasized the observation from last week: when the market hit higher highs, it is rare to see the S&P implied volatility so high (and such a high bid price deviation).

Using the figures provided by John Marshall to quantify, over the past 35 years, when the S&P hit historic highs, the VIX averaged 14.9.

Although it is not possible to precisely differentiate what is driving the gap between current prices and volatility, we may agree on common themes: politics, geopolitics, and corporate earnings. If we were to be optimistic, a series of non-traumatic outcomes may release some risk premiums.

Pasquariello believes that the following chart is the best pick of the week. It illustrates the profit growth over the past 12 months, explaining why he pays close attention to this when considering the outstanding performance of the fundamentals of US blue-chip tech stocks.

Considering the comprehensive analysis above, Pasquariello believes the main theme is as follows:

• Given the inherent friendly interaction between US economic growth and the Federal Reserve, his basic view is positive.

• At the same time, risk/reward does not necessarily mean one should go all-in now (even though the policy firepower has been fully utilized in the past month, the S&P 500 index has not shown that much upward convexity).

• Therefore, Pasquariello will stick to holding a heavy position in US stocks and retain some risk units for deployment post-election.

Editor/Somer