Goldman Sachs hedge fund chief's summary: Why the market is much more resilient than expected, somewhat like the end of 1998 or the end of 2007

The U.S. economy is slowing down, but U.S. stocks are still rising. Why?

Tony Pasquariello, head of Goldman Sachs' hedge fund business, pointed out that the current market is in a clear contradictory state. Negative factors include that most market participants still expect the U.S. economy to fall into recession, investors are questioning the sacred status of risk-free assets, and the Federal Reserve is unlikely to change its policy stance in the short term. However, the positive side is:

The U.S. economy has clearly lost momentum, but the job market remains relatively stable.

Tariff-related headlines are still unstable, but the overall trend is beginning to move towards a more peaceful direction.

The market's technical indicators have turned favorable.

U.S. tech companies continue to perform excellently.

As a result, the S&P 500 index has achieved a nine-day consecutive rise, down only 3% year-to-date, with the price-to-earnings ratio at the 85th percentile of the past 25 years. The S&P 500 index has completely filled the gap since April 2, with volatility continuing to decrease, and the 5-day realized volatility has dropped to just 8%.

What is the market really thinking?

Pasquariello specifically mentioned several key points:

① Capital flows and investor positions. The market's technical indicators have improved. Over the past few months, many "leveraged investors" (such as quantitative funds and systematic capital) have been reducing their positions, but now they are buying at higher prices. Although retail investor enthusiasm in the U.S. is not as high as before, they have not turned into net sellers, meaning they have not started to sell off significantly. Finally, large banks and tech giants have mostly disclosed their earnings reports, and now is the peak period for companies to start repurchasing stocks. Pasquariello expects corporate buybacks to exceed $1 trillion this year.

② U.S. tech stocks. The days of explosive surprises and crazy upward revisions in earnings forecasts for U.S. tech giants may be over. However, it is an objective fact that companies like Apple, Microsoft, and NVIDIA are still the most aggressive in "making money, reinvesting, and buying back stocks" in the world. Just look at the capital expenditures and buyback amounts these companies report. Although many have reduced their positions in tech stocks over the past few months, the question now is whether investors are willing to come back. Pasquariello believes that at least corporate buybacks will support the market.

③ U.S. economic growth. Pasquariello cited Anshul Sehgal's remarks from last week, which he did not fully understand at the time: the U.S. government's fiscal deficit has now increased by 7% year-on-year. This means that while everyone is talking about excessive spending and the impact of DOGE, the reality is that the U.S. is still spending money, and fiscal policy is still moderately expanding. This also explains why "hard data" (such as employment and consumption) has not shown a significant decline yet, as the government is supporting it from behind

④ Tariffs. Although everyone is pondering "how exactly Trump’s tariff policy is going to play out," there hasn't been much new substantive news this week. The core viewpoint is that "the most extreme wave has passed, but uncertainty remains, and economic friction will not disappear immediately." Pasquariello expects that in the coming month, there may be some "trade framework agreements" announced, while on the other hand, the momentum of the U.S. economy is slowly weakening.

⑤ Federal Reserve. Next week's FOMC meeting may not see much action. Pasquariello anticipates that Powell may try to say as little as possible, adopting a posture of "the Federal Reserve remains passively responsive."

In summary, the current market is in a strange phase of macro uncertainty, yet strong technicals and corporate earnings. Additionally, Pasquariello mentioned that he has met with many clients over the past month, and their sentiment towards U.S. assets remains very pessimistic, especially among non-U.S. investors. This explains why the stock market is more resilient than many expect, somewhat like the trends seen at the end of 1998 and 2007— the more people fear, the less the stock market declines.

Pasquariello pointed out that he does not know whether this is a bull market or a bear market, but he is certain that this kind of volatility will continue. From a technical perspective, although the upward trend of the S&P after the pandemic has been severely tested, it currently appears that this major trend has not been broken