Goldman Sachs traders: The most painful but possible scenario is a "three-year bear market in U.S. stocks," repeating the "2001-2003" script

The financial market is changing rapidly, and investors' emotions are fluctuating accordingly. Recently, Goldman Sachs' top macro trader Paolo Schiavone issued a warning: Has this round of decline ended? He believes that the current market vulnerability indicates that stock returns will continue to face challenges.

Schiavone's views are not unfounded. Two weeks ago, the market already showed some worrying signs. Although there may be a relief rebound in the short term, structural headwinds still exist, making it difficult for the stock market to sustain an upward trend.

What is even more unsettling is that Schiavone believes the biggest risk is not a financial crisis, but a worse scenario: a slow, torturous bear market that could last for years. Without a significant credit event to force a market reset, the stock market may repeat the pattern of 2001-2003—economic momentum fading, weak stock rebounds, multiple false bottoms, and continuously setting new lows.

No Crisis, More Pain: The Torment of a Long Bear Market

Schiavone points out that due to the lack of a clear financial crisis, the market will not experience the kind of rapid and severe sell-off that could reset valuations through forced deleveraging. Instead, the risk facing the market is a slow, painful decline that could last for years, similar to the aftermath of the internet bubble burst:

• Bottom fishers will continue to be punished as profit growth slows and valuation multiples compress.
• Credit tightening (about 20%) typically signals an economic recession, but in the current cycle, without a crisis, there is no moment of forced deleveraging to create a lasting bottom.
• The starting point for stock allocation is high— as stock performance disappoints, personal wealth may flow back into real estate, just like in 2003-2004.

The Decline of American Exceptionalism and Rising Consumer Pressure

The once-glorious "American exceptionalism" is gradually fading, and American consumers are beginning to feel the pressure:

• Consumer confidence is declining, and discretionary spending is decreasing.
• Inflation in essentials (food, energy, housing) persists, making it difficult for the Federal Reserve to decisively pivot.
• Global capital is withdrawing from the U.S., tightening domestic liquidity and increasing volatility.

Macroeconomic Volatility and Policy Uncertainty Intensify Market Turbulence

Multiple factors intertwine to cause a surge in market volatility:

• Geopolitical risks (Russia-Ukraine conflict), changes in fiscal policy (Europe increasing defense spending), and U.S. tariff threats have increased uncertainty, leading to interest rate volatility.
• European interest rate volatility has lagged behind that of the U.S., but is now catching up, especially at the long end of the curve.
• The market's expectations for Federal Reserve rate cuts are misaligned— the easing cycle may require 20-50 basis points deeper than currently anticipated

Trading Dynamics: Forced Liquidation and Technical Collapse

The deleveraging of hedge funds has reached its highest level since 2008, exacerbating liquidity-driven volatility.

Systematic traders (CTAs) have been actively selling, but by next weekend, forced selling should begin to ease.

Key technical levels are collapsing, with former support levels turning into resistance, increasing the risk of further declines.

Weak Dollar and Global Capital Rotation

The dollar is replaying the pattern of 2017, weakening as policies shift to support interest rate cuts and monetary easing.

Europe and emerging markets will benefit from this, as capital outflows from the U.S. create opportunities for these regions.

As investors hedge against currency uncertainty and political risks, gold is expected to rise.

Trading Strategies: Proceed with Caution and Seize Rotation Opportunities

In this market environment, Schiavone proposed several trading ideas:

• Long MDAX (German Mid-Caps): Lower front-end rates, massive fiscal stimulus, cheap energy, and the potential acceleration of a peace agreement in Ukraine could drive a rebound in German mid-caps.
• Short Bond Alternatives (UB/WN Shorts): The upcoming surge in bond supply should drive the sell-off of long-term assets, creating downside space for bond alternatives.
• Long Euro Interest Rate Volatility (6m30y payer swap options, 3m10y straddle options): Rising fiscal and geopolitical uncertainty will push up long-term interest rate volatility in Europe.
• Steepening Euro Interest Rate Curve (buy 2-year 2s30s, sell German ASW boxes): The market has underestimated the impact of changes in European fiscal policy, which should push up long-term rates.
• Short Russell 2000 / Long Nasdaq: Small caps remain highly susceptible to tightening financial conditions, while large tech stocks are performing well (e.g., strong performance from Broadcom).
• Long Gold, Short DXY (Weak Dollar Strategy): Trump's policy stance favors a weaker dollar, supporting gold prices—especially if the dollar continues its 2017-like downtrend.

Conclusion: Patience, Tactics, and Transition

Schiavone concluded that the most painful and likely scenario is a three-year bear market—not a sharp crisis, but a slow decline without a clear reset moment. U.S. consumers are weakening, inflation persists, and global capital rotation is accelerating, all of which undermine the stability of the stock market.

The market remains fragile—while a relief rally may occur in the short term, it will lack sustainability without fundamental catalysts. The technical collapse and forced liquidations by hedge funds make price movements unpredictable, increasing volatility risk. Trade cautiously, focus on volatility, and prioritize capital rotation themes over broad equity exposure This environment requires patience, tactical positioning, and the recognition that this is not a time to bottom-fish, but rather a transition that needs to be approached with caution