Don't fight the trend! Goldman Sachs top trader: Three major cycles resonate, summer "融涨行情" may be coming

Multiple favorable factors are driving the rise of risk assets, and Goldman Sachs traders predict a "melt-up" market this summer.

On Thursday, Paolo Schiavone, a top trader in Goldman Sachs' macro trading department, stated that artificial intelligence, bank stocks, Nvidia, the Chinese stock market, Bitcoin, and copper prices have all broken through, showing strong momentum. The current summer "melt-up" (fear of missing out on the rise leading to blind following buying) has not yet been fully priced in by the market, and investors should "go with the flow and not go against the trend."

Schiavone believes that the resonance of three major cycles is creating a bullish environment. The U.S. is in the mid-to-late stage of the business cycle, with no signs of recession and strong profit growth, while expectations for interest rate cuts remain. The market sentiment cycle is turning positive but has not yet reached a euphoric state, leaving room for further increases.

Schiavone pointed out that as volatility declines again, supported by profit growth, stock market valuation multiples are expected to gain expansion space. He believes that if the Federal Reserve's policy shifts in conjunction with the already loose financial environment, it will create ideal conditions for "melt-up trading." Currently, risk asset investors are actively seeking pullback opportunities to increase their risk exposure.

The trader emphasized that this is not an environment for a significant 10% drop in the stock market unless there is an external shock. He believes the market is forward-looking and should follow price trends rather than overinterpret macro signals.

The Resonance of Three Major Cycles Creates a Bullish Environment for U.S. Stocks

Schiavone analyzed the positive signals from the current three key cycles:

At the business cycle level, the U.S. economy is in the mid-to-late stage, with no signs of recession and strong profit growth, while interest rate cuts are still anticipated. Hard data may be improving, including manufacturing, employment, and capital expenditures.

In terms of sentiment cycles, the market is turning more positive but has not yet reached a euphoric state, leaving room for further increases.

The structural cycle shows that low macro volatility combined with digital productivity prosperity resembles the environment of the 1990s.

Goldman's risk appetite indicator shows that we are currently experiencing one of the most rapid recoveries in history, and this quick rebound should be taken seriously, similar to the performance in 2020.

It is worth mentioning that Goldman Sachs stated that cyclical stocks are outperforming defensive stocks, with expectations of accelerating economic growth. Among them, bank stocks are particularly prominent, with Chinese bank stocks, U.S. bank stocks, and European bank stocks all rising. Schiavone believes that "bank stocks are the beta coefficient of the economy."

Real Inflation is Generally Cooling, Volatility is Returning to Low Levels, and Emerging Markets are Also Recovering

In the debate over inflation and growth, Schiavone believes that the market has moved past concerns about growth. He pointed out that inflation remains the biggest risk most clients worry about, but real inflation is broadly cooling. The acceleration of growth without reigniting inflation has not yet been fully priced in by the market The combination of slowing inflation and accelerating earnings will equal valuation multiple expansion. This combination creates a favorable environment for the stock market, especially in a low volatility environment.

Schiavone observed that front-end volatility in stocks is oversupplied (systematic/retail sell-off), while there is moderate demand for long-end volatility (discretionary hedging). The current volatility regime is similar to the bull market setup from late 2018 to early 2019.

He believes that low policy interest rates suppress volatility, and liquidity remains abundant. Real interest rates are now more important for stock pricing. Regardless of the volatility regime, the thirst for yield persists: from credit to dividend stocks to structured products.

Additionally, Schiavone noted signs of recovery in China and emerging markets, although investor positioning is not crowded. He believes the current environment is similar to the emerging market rebound from 2009 to 2015, although the leading sectors differ, primarily focusing on technology, artificial intelligence, and local themes.

The breakout signals from the Chinese stock market and Bitcoin indicate a rise in risk appetite and the formation of a re-inflation theme in emerging markets. Markets like Poland and Greece benefit from cyclical and reform-driven tailwinds.

Risk Warning and Disclaimer

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