Goldman Sachs trader: This week's madness has exceeded all expectations

Last week, the market experienced the most severe sell-off since the pandemic began in March 2020, with the S&P 500 index dropping over 9% in a single week. In response, Goldman Sachs traders candidly stated that the market's madness "exceeded everyone's expectations."

Goldman Sachs' top trader John Flood mentioned in a client briefing on Sunday that the market may not have hit bottom yet, as the negative impacts of global tariff escalations on GDP growth, corporate earnings, and inflation are just beginning to manifest, and market volatility will persist.

However, he noted that Goldman Sachs data shows that when market sentiment falls to the currently extremely low levels, there is a 70% probability that the S&P 500 will achieve positive returns in the next two weeks.

Epic Sell-off: The Market Faces an Unstoppable Storm

According to John Flood's briefing, last week's market volatility exceeded everyone's expectations. The volatility market originally anticipated a 2.6% weekly fluctuation for the S&P 500, but it actually plummeted an astonishing 9.08%. On April 3 (Thursday), the S&P 500 fell 4.84%, marking the worst single-day performance since June 11, 2020, and then on April 4 (Friday), it dropped another 5.97%, the worst trading day since the 11.98% decline during the COVID-19 lockdown on March 16, 2020.

Last Thursday and Friday became the busiest periods in the history of the U.S. stock market. Statistics show that on April 4, the trading volume in the U.S. stock market reached a historical high, with a total of 26.6 billion shares traded across all U.S. stock exchanges, breaking the previous record of 23.67 billion shares set during the GameStop frenzy on January 27, 2021.

Goldman Sachs data indicates that April 3 and April 4 will also become the two busiest days in the company's Delta trading history based on the number of shares traded. According to Goldman Sachs' statistics, hedge funds had a decent performance on April 3, but it significantly worsened on April 4 (fundamental long/short hedge funds fell 2.7%, marking the worst day since January 27, 2021).

Unprecedented Sell-off Intensity: Institutional Investors Significantly Reduce Positions

Goldman Sachs Prime Brokerage data shows that last week (even excluding trading on April 4), hedge funds net sold global stocks at the highest level since 2010, primarily driven by short selling, with relatively fewer long positions being sold (a ratio of 8:1). The nominal short selling volume last week also set a new record. Hedge funds net sold global financial stocks at the second-fastest pace since 2016.

U.S. macro products (indices + ETFs) faced the largest nominal short selling in recorded history, as hedge funds actively increased hedging positions during the market decline. Long-term investment institutions significantly sold off on Thursday (in a stable and orderly manner throughout the day) and on Friday (more sporadically and in larger sizes, with some requests for capital replenishment). The supply was mainly concentrated in the financial, industrial, and technology sectorsGoldman Sachs data shows that the cash levels held by mutual funds have reached a historic low (accounting for 1.5% of total assets under management), and they have significantly bought financial stocks earlier this year. Therefore, further selling pressure from this group should be guarded against.

Market Outlook: Short-term Risks and Long-term Opportunities

The market will continue to remain volatile, and the recent/medium-term lows may not yet be seen at the index level. The corporate buyback blackout period will last until April 24. The best bid-ask spread for S&P futures dropped to $2 million yesterday, close to the historical low (the historical average is $13 million). Institutional investors will begin to gradually buy in after the S&P 500 index falls below 5000 points.

The recently announced tariffs are much harsher than the market expected (the market had already fully anticipated this event). Goldman Sachs economists estimate that the tariffs announced so far this year will raise the effective tariff rate in the U.S. by 19 percentage points (from 3% to 21%).

On a positive note, the government has taken a comprehensive approach, and negotiations with trade partners may ultimately lead to tariff rates lower than those just announced. Some capitulatory signals have appeared in the market, with yesterday's trading volume hitting a historical high, and Goldman Sachs' sentiment indicator dropping to -2.5. According to Goldman Sachs data, when the sentiment indicator falls to such low levels, the average return of the S&P 500 index over the next two weeks is +1.25%, with a positive return 70% of the time.

Macroeconomic and Corporate Earnings Outlook: Adjustments Have Begun

John Flood warned that even with positive progress in negotiations, it will be very difficult to "put the toothpaste back in the tube" after April 2. The implemented tariff measures may simultaneously hit GDP and EPS growth and push up inflation.

Wall Street has not yet recalibrated estimates, and consensus is expected to be significantly downgraded in terms of GDP and EPS growth. Goldman Sachs currently assesses the probability of a recession at 35%. The current forward P/E ratio of the S&P 500 is 20 times, while the average forward P/E ratio during recessions is 16 times (30-year average).

According to Goldman Sachs' macro earnings model, a 100 basis point change in U.S. GDP growth will affect S&P 500 EPS growth by about 3-4%, and an average tariff rate increase of 5 percentage points will reduce EPS forecasts by 1-2%.

Earnings Expectations and Market Valuation: Is Consensus Too Optimistic?

The banking sector will kick off the earnings season next week, while the 2025 S&P 500 EPS expectations have only declined by 2% so far this year (which is concerning). Goldman Sachs expects S&P 500 EPS to grow by 3% in 2025 and by 6% in 2026. This forecast is below the top-down strategist consensus (+10% and +9%) and the bottom-up stock analyst consensus (+9% and +14%).

The consensus expects S&P 500 profit margins to rise above 12% this year, setting a historical high, while Goldman Sachs expects margin expansion to be minimal. The consensus expects a year-on-year EPS growth of 6% in the first quarterThe current forward price-to-earnings ratio of the S&P 500 at 20 times is at the 77th percentile of a 30-year review.

Risk Warning and Disclaimer

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