Goldman Sachs warns: The outlook for the U.S. stock market bull market hides risks, and the current layout for hedging is the most cost-effective

According to the Zhitong Finance APP, trading departments of several financial institutions, including Goldman Sachs and Castle Securities, are informing clients to purchase cheap hedging tools to guard against potential losses in the U.S. stock market. Meanwhile, the record gains in the U.S. stock market are facing a series of risk tests.

Recently, the benchmark U.S. stock indices have surged due to strong earnings reports and a trade agreement between the U.S. and Japan. The S&P 500 index has risen 28% since its low on April 8, and the "fear index" has hit a new low since February. This backdrop has made the cost of hedging against a market downturn very low. The cost of hedging a 10% decline in the S&P 500 index ETF over the next month is currently at its lowest level since January compared to the cost of hedging a 10% increase.

Goldman Sachs' trading department wrote in a report to clients on Monday: "If you feel anxious, then the market is clearly making hedging operations very easy to execute."

However, the market is facing a series of events that could adversely affect it. The Federal Reserve will announce its next interest rate decision on July 30, just two days before the tariff deadline set by U.S. President Trump. The U.S. has yet to reach a trade agreement with major partners like Mexico and Canada. A stalemate in negotiations and renewed trade tensions could weaken investor sentiment and disrupt the optimistic risk appetite.

The non-farm payroll report for July will also be released next week, which will have significant implications for the Federal Reserve's policies in the coming months. Additionally, important earnings results from major tech companies, including NVIDIA (NVDA.US), are also on the horizon.

John Tully from Bank of America Securities wrote in a report to clients on Monday, "It's time to buy volatility," noting that the VIX index typically reaches its lowest point of the year in July. He advised clients to purchase S&P 500 put options expiring on August 22 to capture much of the volatility resulting from the Federal Reserve's response at the annual economic symposium in Jackson Hole.

There is certainly reason to believe that the current upward trend will continue. Scott Rubner, head of equity and equity derivatives strategy at Castle Securities, told clients that retail investors are a group that can provide support. Furthermore, according to Tully, if the Federal Reserve finds that tariffs do not drive inflation or hinder economic growth, a rate cut in September could further boost the stock market.

Members of JPMorgan's equity derivatives sales team, including Ilan Benhamou, advised clients to purchase put options expiring on August 1 to hedge against the risk of a stock market decline triggered by the tariff deadline and the release of the July non-farm payroll report on the same day According to Rubner, as the U.S. stock market continues to rise, the long positions of various institutional investors (including systematic funds) are nearing a high. He added that they will soon "slow down their buying pace."

Rubner urged investors to begin hedging operations set to expire in September to guard against risks from significant events. Additionally, he stated that historical data supports this: from the data of 1928, September has been the worst-performing month for the U.S. stock market