This is Goldman Sachs' top traders' thoughts on the market this week

Goldman Sachs Group's top traders are closely monitoring a market filled with contradictory signals.

On one hand, the astonishing capital expenditures of tech giants are sparking a global investment boom, reviving merger and acquisition activities and enabling cyclical stocks to outperform the market; on the other hand, macro uncertainties such as potential "Trump tariffs" and future interest rate paths are casting a shadow over market prospects.

A particularly prominent new dynamic is that the stock price reactions during earnings season are becoming unusually "violent." According to Goldman Sachs trader Brian Garrett, this is the first time in their 18-year data set that the actual stock price fluctuations of S&P 500 constituents on earnings report days have generally exceeded the implied volatility from the options market. This phenomenon indicates that the market's reaction to corporate performance is more sensitive and intense than ever before.

Meanwhile, macro political risks have re-emerged as a market focus. "Will Trump really trigger inflation?" has become a core topic on trading desks. Goldman Sachs' economic team believes that while factors such as artificial intelligence, energy transition, and de-globalization are all under discussion, the only factor that can be clearly categorized as a "Trump phenomenon" is tariffs. Their analysis shows that the impact of tariffs on import prices is "astonishingly large," while the inflation momentum of the U.S. economy itself is relatively mild when excluding tariff effects.

"Violent" Reactions During Earnings Season Amplify Individual Stock Risks

For individual stock investors, the risks during the current earnings season are sharply increasing. Goldman Sachs trader Mark Wilson emphasized last week that the European market has given the most severe stock price punishment on record to companies that underperform expectations. Now, this phenomenon is also being confirmed in the U.S. market.

Data shows that the actual volatility of S&P 500 constituents on earnings report days has, for the first time, generally exceeded implied volatility. The reasons behind this are complex, but one important factor may be the large-scale volatility supply brought about by various structured products.

Regardless, this phenomenon is significant for individual stock investors: it means that both opportunities and risks for individual stocks are being amplified simultaneously, making it crucial to accurately grasp performance trends.

Meanwhile, the scale of capital expenditure growth among cloud service providers is astonishing. Goldman Sachs states that next year, the spending of the "Seven Giants" will exceed 1% of U.S. GDP, which is larger than the capital expenditures of the telecommunications industry in 1999-2000, but still some distance from the peak of about 5% during the railroad boom.

Macro Fog: "Trump Tariffs" and the Fed's Rate Cut Path

From now until the end of the year, the tug-of-war between growth and interest rates will increasingly become the core issue in the market. All eyes will be on U.S. employment and consumption data. Goldman Sachs Chief Economist Jan Hatzius and his team point out two key characteristics to watch in this debate.

The first is the potential impact of "Trump tariffs." Goldman Sachs' baseline scenario analysis shows that without tariffs, despite other so-called inflation factors, the actual inflation momentum of the U.S. economy remains mild. This means that tariffs are the biggest variable in the future inflation path. The second is the pace of the Fed's rate cuts, with the market closely monitoring leading indicators such as unemployment rates in the tech sector to gauge the rhythm and timing of future rate cuts

Market Paradigm Shift: European Banks, UK Stock Market, and Retail Speculation

The current market is challenging many inherent investment concepts. Goldman Sachs states that a thought-provoking "undeniable fact" is that, over the past five years, unless investors happened to buy European bank stocks within a narrow five-month window around Christmas 2022, the returns from holding European bank stocks have consistently outperformed those from holding U.S. mega-cap tech stocks.

Another noteworthy phenomenon is occurring in the UK. A bidding war for Spectris, with a premium exceeding 100%, once again highlights the trend of "de-equitization of the UK stock market." Wilson believes that regardless of policy outcomes, investment opportunities exist: If policies remain unchanged, the growth of UK stock market assets will lead to net capital inflows, and there are many attractively valued stocks; if policies undergo a positive shift, starting from the current valuation baseline, a highly attractive multi-year investment opportunity will emerge.

Moreover, despite emerging economic concerns, the fervor for speculative trading among retail investors has not diminished in the slightest. Goldman Sachs' report suggests that the duration of this phenomenon may be much longer than professional investors anticipate, and in the short term, it is not a clear bearish signal.

Finally, Washington's policy momentum regarding cryptocurrencies and the trends of Bitcoin are also worth paying attention to.