US stocks "chaotic week," Goldman Sachs hedge fund chief: Many results have been revealed, but there are more questions than answers

For market participants, the past week has undoubtedly been "full of information but chaotic." This is how Tony Pasquariello, head of Goldman Sachs' hedge fund business, described it in a recent report. He believes that although many key events have settled, the questions left by the market seem to outnumber the answers, making the risk-reward dynamic particularly tricky in the short term.

Recent developments show that the market is struggling to digest multiple conflicting signals. On one hand, a new round of tariff fluctuations and a "clearly poor" non-farm payroll report have cast a shadow over the macroeconomic outlook and directly triggered a sharp decline in short-term Treasury yields on Friday.

On the other hand, major U.S. tech companies delivered another strong quarterly earnings report, but their lackluster stock price reaction suggests that the market has already priced in the good news, and investor expectations have become more stringent. Meanwhile, small-cap stocks faced their worst week since a critical period, with severe sell-offs further exacerbating market anxiety.

These conflicting signals, combined with the typical low liquidity of summer markets, create a complex picture. While long-term structural factors may still be optimistic, in the short term, traders are facing a challenging trading environment.

Tech Giants: Strong Earnings Can't Hide Stock Price Weakness

In the past week, the earnings reports of major U.S. tech companies once again showcased their strong profitability. According to Goldman Sachs' estimates, excluding Nvidia, the "Tech Seven" saw a year-on-year earnings growth of up to 26% in the second quarter, while the remaining components of the S&P 500 only grew by 4%. However, such strong performance did not effectively boost stock prices, and Pasquariello believes this reflects that the market's pricing of tech stocks has entered a "higher demand phase."

In stark contrast to the strength of large tech stocks, the market breadth is severely lacking. The sell-off in small-cap stocks is particularly noteworthy, with the Russell 2000 Index (RTY) declining for five consecutive trading days, with a cumulative drop of 4%, marking its worst weekly performance since last year.

Pasquariello pointed out that the S&P 500's return this year has largely been driven by a few stocks. This highly concentrated phenomenon, combined with the weakness in small-cap stocks, paints a picture of poor internal market health.

Tariff Impact: From "Destructive" to "Disruptive"

Tariff issues have recently returned to the market's focus, with new tariff fluctuations adding new uncertainties. However, Pasquariello observed that most market participants and business operators no longer view tariffs as a dominant variable in their decision-making. One client told him that tariffs are more "disruptive than destructive."

Nevertheless, the impact of tariffs has begun to show in macro data. Goldman Sachs' team of economists predicts that based on announced measures, the average effective tariff rate in the U.S. will rise by 9 percentage points, accumulating to increases of 14 and 17 percentage points by the end of this year and next year, respectively Goldman Sachs' American economist Joseph Briggs expressed deeper concerns about this. He believes that although the market may have currently digested the expectations of tariffs, their drag on economic growth and upward pressure on prices may become the focus of the market again in the coming months.

Reversal of Capital Flows, Cooling Leverage Risks

For the past two months, healthy capital flows have been a key technical factor supporting the market. However, in the past week, capital flows have clearly shifted towards risk aversion. Pasquariello stated that the capital movement in Goldman Sachs' equity business has "clearly favored risk aversion," while consensus trades in the macro field have been severely impacted.

Looking ahead, the tailwind from capital is weakening. The report predicts that entering August, the intensity of speculative positions and retail investor demand may decline. Although corporate buybacks will enter a window period, providing some support, overall, capital flows will shift from being a "major driving force to a moderate driving force."

A positive signal is that the high leverage risks previously concerning the market seem to be easing. According to data from Goldman Sachs' Prime Brokerage (GS PB), the total leverage level in the market has seen the largest decline since June 2023 over the past two weeks. Pasquariello summarized that this indicates "the pressure around excessively high total risk exposure is now better controlled."

Global Perspective: U.S. Stocks Maintain Relative Advantage

In the chess game of global asset allocation, Pasquariello remains optimistic about U.S. assets, especially technology stocks. He pointed out that although there was a brief comprehensive sell-off of U.S. assets in April, it proved to be a temporary phenomenon, as U.S. tech stocks once again demonstrated their value during the second quarter earnings season.

In contrast, while European stock markets have performed well this year, even yielding better returns in dollar terms, Pasquariello believes this is more of a "great trade" rather than a "structural story." He expects that as the European Central Bank ends its easing cycle, U.S. stocks will outperform Europe again in the second half of 2025.

Regarding the Chinese market, the report acknowledges that it has achieved good returns this year, especially in the technology sector, with the Hang Seng Tech Index rising by 22%, and it has "reminded the world that it is a force not to be ignored" in the field of artificial intelligence. However, the report also points out that the market is still waiting for domestic consumption, a "key factor," to be "fully released."

Federal Reserve Dilemma: Risk of Policy Missteps Reemerges

Interestingly, in Pasquariello's analytical framework, the Federal Reserve is only mentioned at the tenth point. He believes that a lot of significant events have occurred over the past seven months, but the Federal Reserve has remained inactive, making it difficult to say it is the determinant of stock prices.

Currently, the core issue facing the market is the same as it was a year ago: the risk of policy missteps. As Federal Reserve Chairman Jerome Powell stated in April, the Federal Reserve may find itself in a "challenging scenario where dual mandate goals are contradictory"—core goods inflation is rising while the labor market is significantly softening For traders, Pasquariello's final advice is to pay attention to the signals provided by the market. He believes that short-term options have become an important tool for professional fund managers. His ultimate advice is: "If the options market in August gives you the opportunity to buy cheap gamma (volatility risk exposure), I would seize it."