Goldman Sachs hedge fund chief: The past week was "one of the most important of the year"

This week, the S&P 500 index reached a new high, and the Nasdaq 100 saw five consecutive days of gains, led by technology stocks.

Tony Pasquariello, head of Goldman Sachs' hedge fund business, stated in a recent report that this week is one of the most impactful weeks for the market this year. He described it as a "legitimate banger," meaning a substantial breakout.

From a geopolitical perspective, there are two major turning point-level events. One is the U.S. airstrikes on Iranian nuclear facilities, and the other is NATO's commitment to increase military spending to 5% of GDP. Dutch Prime Minister Mark Rutte stated that NATO will become "stronger, fairer, and more lethal."

There are also signs of warming in U.S. domestic politics, with the controversial "Clause 899" potentially being repealed and several trade agreements expected to be reached.

In the market, there are clear trends across major asset classes. Oil prices have plummeted, the dollar has weakened, the U.S. interest rate curve has steepened into a bull market, industrial metal prices have surged, and thanks to a 6% rise in large tech stocks, the S&P 500 has reached a historic high.

Funds Are Not Aggressively Increasing Positions

Goldman Sachs also observed that despite the stock market hitting new highs, many investors are not fully invested in chasing the rally, with overall fund positions remaining at a moderate level, without the extreme state of aggressive buying seen in July last year, at the end of the year, or in February this year.

In terms of fund flows and positions, Goldman Sachs uses a scale of -10 to +10 to measure the overall bullishness of the market, currently around +5, which indicates a "bullish but not extreme" position. Several details support this judgment. First, the positions of actively managed funds are at the 44th percentile of the past three years. Second, quantitative fund positions are only at a score of 5 (out of 10). Third, 16 internal indicators at Goldman Sachs collectively show that market positions are at a median level of 50%.

This also means that if there is a short-term pullback in the future, there may be buyers stepping in—Goldman Sachs believes that if there is a pullback next week due to quarter-end, payroll data, or budget negotiations, it could actually present a tactical buying opportunity. Next week, several events are on the horizon, including non-farm payroll data, quarter-end, budget debates, and the tariff deadline on July 9.

Although hedge funds are not fully invested overall, there are clear winners in sector selection. For example, Goldman Sachs' PB data shows that the financial sector has seen net buying for 10 consecutive weeks. Recently, the ratio of client inquiries about AI to those about tariffs is about 5 to 1, and this ratio may even be underestimated.

In the U.S. stock market, small-cap stocks continue to perform poorly. Even when the economy grows by 3% and the Federal Reserve cuts interest rates significantly by 100 basis points, they have not outperformed. Goldman Sachs believes it will be even harder to achieve excess returns in the future. However, small-cap stocks are a hedging tool against many risk factors, and Goldman Sachs also believes that small-cap stocks may experience a few short-term surges in the second half of the year that are not picky about fundamentals.

Goldman Sachs shared some of the "bullish theme baskets" they track—AI, energy transition (including nuclear energy), bank stocks, quantum computing, and robotics. These thematic combinations have recently shown not only good absolute returns but also outperformed the broader market

U.S. Tech Stocks Remain Core Momentum

Goldman Sachs believes that despite the pullback in tech stocks this year, the demand for technology investment from companies remains strong.

The Q1 earnings reports have proven this point. In recent weeks, companies like Broadcom, Oracle, and Micron have also provided strong guidance. Therefore, although the threshold for Q2 earnings reports will be higher due to increased market expectations, in the long term, the largest tech companies globally are still making significant profits, paying dividends, repurchasing shares, and reinvesting, which provides strong support. Goldman Sachs stated that it will not "short this high-speed train," but rather continue to increase positions during pullbacks.

U.S. Economy Slowing in the Short Term, Stable in the Long Term

The U.S. economy has already slowed this year, particularly reflected in the labor market. Goldman Sachs predicts U.S. GDP growth of 1.25% in 2025 and close to 2% in 2026.

From the perspective of economic growth pace, this year will bear the uncertainty of tariffs and the overdraw effect of front-loaded consumption, and hard data in the second half of the year may continue to weaken, such as the unemployment rate possibly rising to 4.4%. However, fiscal spending and AI infrastructure investment will still play a stabilizing role in the economy.

The current market view is that these short-term abnormal fluctuations will pass, and next year will return to trend growth.

Federal Reserve's Attitude Remains Cautious, Not the Main Factor Determining the Stock Market

Although some members of the Federal Reserve Committee are "tentatively discussing" a rate cut in July, and market interest rate futures are heavily betting on a rate cut in September, Powell's testimony this week indicates a very clear attitude of remaining cautious. There are about five weeks until the July FOMC meeting and two months until the August Jackson Hole central bank annual meeting, and Powell wants to wait a bit longer to see how the economy and inflation develop before making a decision.

Currently, Goldman Sachs' global investment research team has provided a forecast that differs somewhat from the Federal Reserve and the market—only one rate cut in December this year, followed by two more next year, bringing the rate down to about 3.625%. Analysts believe that while the market's loosening expectations for interest rates have boosted the stock market, the Federal Reserve is not currently the main factor determining the stock market