Goldman Sachs top traders discuss U.S. stocks: "Late summer headwinds" are coming

After experiencing a rise driven by both the AI boom and dovish expectations, Goldman Sachs traders warn that investors need to prepare for the upcoming "late summer headwinds."

Recently, Goldman Sachs senior trader Rich Privorotsky warned that the U.S. stock market is facing "late summer headwinds," with liquidity headwinds and seasonal factors posing challenges to the market in September. Although the Federal Reserve's dovish stance and volatility compression continue to support major indices, the AI trading theme is being questioned, and the fundamentals of the consumer and labor markets are weak.

Privorotsky pointed out that the fundamentals of the consumer and labor markets are "not ideal," and there is a risk of the job market shifting from "no hiring, no layoffs" to direct slowdown, a risk that has not been fully priced in by the market.

He therefore suggested that investors maintain a cautious stock position before September, believing that any market pullback that may occur at that time will provide buying opportunities for the end of the year.

On a macro level, the rise in global sovereign bond yields is becoming an undeniable backdrop. Traders believe that ongoing fiscal expansion is pushing up the risk premium on long-term rates, and this week's issuance of over $180 billion in U.S. Treasuries will pose a new test for market liquidity. Meanwhile, political risks in Europe are also accumulating, adding uncertainty to the global market.

AI Boom Cooling, Tech Stocks Facing Short-Term Tests

Once a core driving force behind the market's rise, AI trading has recently shown signs of fatigue.

Privorotsky believes that the short-term momentum in this field has paused, with several key factors behind it.

First, a paper from the Massachusetts Institute of Technology (MIT) highlighting that most AI projects have failed to generate positive returns has garnered unusual attention. Second, news of Meta slowing its hiring, while not impactful in itself, has dampened market sentiment.

Additionally, the highly anticipated ChatGPT-5 is considered "all hype and no substance," failing to deliver surprises. At the same time, OpenAI CEO Sam Altman's comments about "bubbles" and Apple's reiteration that large language models do not truly "think" have doused the fervent market sentiment with cold water.

Ahead of Nvidia's earnings report this week, the market clearly needs more evidence.

Although Privorotsky stated that he remains "crazy bullish on this technology" in the long run, he warned that the market may have built up excess capacity and may need a "reset" before the next wave of innovation (possibly quantum computing or more sophisticated innovations) arrives.

Seasonal, Liquidity, and Labor Market Concerns

In addition to the cooling in specific sectors, a series of macro-level headwinds are also forming.

Privorotsky particularly emphasized that, based on historical patterns, the market's "seasonal performance entering September tends to become ugly."

Liquidity is another pressing concern. The end-of-quarter drawdown of U.S. Treasury funds will increase pressure on the market, and this week's auctions of over $180 billion in 2-year, 5-year, and 7-year U.S. Treasuries will be closely watchedIn addition, the positions of Commodity Trading Advisors (CTA) are also worth monitoring. It is estimated that CTAs hold long positions of about $170 billion, which is close to the $220 billion limit. As the 20-day realized volatility exceeds the 60-day volatility, if volatility rises further, CTAs may turn into market sellers.

On the fundamental level, signs of a cooling labor market are becoming increasingly evident. Traders believe there is ample evidence that the labor market is continuing to weaken, and the market is underestimating the risks of a direct slowdown in job growth.

Betting on a Dovish Federal Reserve and "Shorting the Dollar" Becomes Consensus

Despite facing numerous headwinds, the dovish stance of the Federal Reserve remains a key support for the market.

Privorotsky pointed out that the market has correctly interpreted the Fed's recent statements as dovish, as it emphasizes the "weakening labor market." This has suppressed real interest rates at the front end and allowed trading strategies that bet on a decline or stabilization of short-term rates to be maintained.

Against this backdrop, "shorting the dollar" has become a logical consensus in the market. However, Privorotsky also cautioned that concerns about the political situation in France could pose a short-term impact on this trade.

In the fixed income market, long-term rates globally have had little respite, with Japanese government bond yields continuing to rise, seen as a symptom of excessive fiscal expansion refusing to weaken. This steepening of the yield curve, caused by fiscal profligacy and erosion of credibility, also explains why financial stocks have been able to continue outperforming the market