Goldman Sachs hedge fund chief: The current market is extremely challenging! The most important thing is to "preserve capital"

After experiencing market turbulence last month, trading volume and volatility in the U.S. stock market decreased last week, barely achieving a slight increase.

Tony Pasquariello, head of Goldman Sachs' hedge fund business, reminds investors that the current market environment is complex and ever-changing, making operations extremely difficult. Preserving capital is more important than pursuing returns. Currently, U.S. economic growth has clearly slowed but has not collapsed, and investors need to closely monitor the impacts of trade policy, fiscal policy, and potential regulatory reforms, as well as possible policy shifts from the Federal Reserve.

U.S. Economy: Slowing but Not Collapsing

Pasquariello believes that the current trading environment is completely different from the past few years:

On one hand, the U.S. economy is clearly slowing but has not collapsed, with the latest data showing that growth is still ongoing;

On the other hand, if the market continues to consider recession risks, price-to-earnings ratios will face significant pressure.

Goldman Sachs believes that the current situation is similar to that of 2018, where the market believes the policy "floor" has been set too far away. In 2018, the Federal Reserve was seen as unwilling to support growth, while now it is the U.S. government. As long as investors believe this is a mistake, the market will be highly sensitive to any signs of weak growth until there are indications that the policy stance is changing.

The post-financial crisis market was dominated by the Federal Reserve's unlimited policies, U.S. fiscal spending, and technological advantages, but these factors are now changing. The high complexity of the current environment makes capital preservation crucial.

Tariffs Overall Not Beneficial for Economic Growth

Regarding the impact of U.S. policy uncertainty on economic growth, Goldman Sachs believes that the market's assessment of recent growth risks is largely correct. Investors expect overall tariffs to increase by about 9 percentage points (Goldman Sachs expects 10 percentage points), and fiscal policy will keep the budget deficit roughly unchanged. The constraints faced by tariff increases are minimal, which is clearly detrimental to economic growth.

The tariff announcement on April 2 may bring negative surprises. After the uncertainty around tariffs dissipates, the focus will shift to fiscal policy: Congressional leaders should finalize fiscal plan targets by mid-April, with net tax reductions of about $100 billion/year (0.3% of GDP) and similar-sized but more delayed spending cuts.

Goldman Sachs has currently lowered its 2025 U.S. GDP forecast to a year-on-year growth of 1.7%, but the probability of a recession in the next 12 months has only slightly increased from 15% to 20%. The slight increase in recession probability is partly due to the still healthy fundamentals of the private sector, and the macro impact of layoffs or deportations from DOGE (government employment) is expected to be minimal.

Another key factor is that tariffs are self-harming actions; if the economy weakens significantly, the Trump administration is expected to soften its stance on tariffs.

Goldman Sachs believes that concerns about consumers earlier this year were largely exaggerated, and last week's stronger retail sales report proved this point. The current consumer fundamentals remain robust.

However, if Trump raises the effective tariff rate cumulatively by 10 percentage points on April 2, job growth should slow, and rising inflation will erode consumer income and purchasing power. Therefore, Goldman Sachs predicts that real income growth will slow to 2.0% in 2025 (down from 2.5%), and real consumer spending growth will slow to 1.9% (3.1% in 2024) Regarding the Federal Reserve, Goldman Sachs believes that Powell's current stance is slightly dovish, feeling quite satisfied with the prospect of two rate cuts, and is not worried about the rise in Michigan's inflation expectations. Although high inflation and inflation expectations mean that the threshold for rate cuts will be higher than in 2019, the risks are also much greater. If economic data weakens enough to make the FOMC concerned that the unemployment rate may start to rise, the Federal Reserve may cut rates.

Risk Warning and Disclaimer

The market carries risks, and investment should be cautious. This article does not constitute personal investment advice and does not take into account the specific investment goals, financial situation, or needs of individual users. Users should consider whether any opinions, views, or conclusions in this article align with their specific circumstances. Investment based on this is at one's own risk