Goldman Sachs traders ask, "When will the US stock market feast end?" "Experienced" clients strongly believe that "the cost of economic recession is underestimated."

U.S. stocks have continued to rise this year, with the Nasdaq reaching an all-time high and investor enthusiasm soaring. However, a senior trader at Goldman Sachs has poured cold water on the situation: this "feast" may be nearing its end.

While U.S. stocks are on the rise and market sentiment is optimistic, Paolo Schiavone, a senior macro trader at Goldman Sachs, recently raised a question: when will this feast end? In his view, despite the market appearing strong on the surface, some "experienced" clients firmly believe that the risk of economic recession is severely underestimated by the market. The current market structure, policy environment, and economic data are presenting investors with unprecedented uncertainty.

Recent market dynamics show that the Nasdaq 100 index has achieved a compound annual growth rate of 14.25% over the past 40 years, far exceeding the broader market. The market's reliance on the Federal Reserve's easing policies is becoming increasingly evident, with investors generally betting on interest rate cuts. However, the volatility index VIX has recently shown a technical rebound, and credit spreads have widened, indicating that underlying market risks are accumulating.

Schiavone pointed out that the labor market, changes in volatility, and the Federal Reserve's ability to extend the economic cycle are key factors determining whether the U.S. stock "party" can continue. Although corporate earnings have not yet shown a typical decline before a recession, and the private sector's balance sheets are healthy, demand has been overdrawn, leverage has shifted to government and private assets, and the impending "debt peak" in the private sector poses future risks.

Schiavone believes that the core issue for the market is whether investors are underestimating the cost of economic downturns and the response space for the Federal Reserve and fiscal policy. With slowing growth, a weak labor market, and deteriorating technical indicators, the market is at a critical turning point.

Hidden Concerns Behind the Market Feast: Structural Risks and Policy Dilemmas

Goldman Sachs trader Paolo Schiavone emphasized that the current strong performance of U.S. stocks masks multiple structural risks.

First, although corporate earnings have not shown significant declines and private sector balance sheets are relatively healthy, demand has been prematurely overdrawn, and economic growth momentum is weakening. The housing market is weak, leverage risks are gradually shifting to government and private assets, and the "debt peak" in the private sector is approaching, leading to increased repayment pressure in the future.

Second, the labor market has become a key variable. Although the probability of unemployment is low, data from the New York Fed shows that once unemployed, the probability of finding a job again is only 44.9%, a historic low. This risk is underestimated by the market; if the labor market deteriorates, consumption and economic growth will face greater pressure.

Additionally, the volatility market has shown a turning point. The VIX index has been declining since 2022, but recently it has shown a technical rebound, and credit spreads have widened, indicating a decrease in market risk appetite.

Goldman Sachs traders believe that low volatility can only be sustained in an ideal "Goldilocks" environment, and currently, neither correlation nor the macro environment supports this situation. Policy Level, the market is highly dependent on the Federal Reserve's interest rate cut expectations, but if inflation remains high, the room for rate cuts is limited. Fiscal policy is also constrained by high debt and interest burdens, leaving little room for further stimulus.

Goldman Sachs traders point out that the market's confidence in the "Federal Reserve and government backstop" is overly optimistic, and there are few actual policy tools left.

Focus on CPI Data in the Next 48 Hours

Schiavone stated that although the overall market sentiment is optimistic, some "experienced" Goldman Sachs clients strongly believe that the risk of economic recession is underestimated.

He believes that the market's interpretation of leading and lagging indicators will determine the success or failure of investments in the next 12 months. Currently, there is a significant divergence in the performance of cyclical and defensive sectors, with the misalignment between the yield of 10-year Treasury Inflation-Protected Securities (TIPS) and sector performance reaching its highest level in two years.

From a technical perspective, the market is in a high-level consolidation phase, and the formation of a top often takes several months. External indices and secondary signals have become particularly important, and the continued strength of the artificial intelligence sector is key to maintaining market enthusiasm, although its valuation has been fully reflected.

Schiavone suggests monitoring the CPI (Consumer Price Index) data in the next 48 hours:

If the CPI exceeds expectations, the S&P 500 (SPX) is expected to rise to 6200 points, and he will choose to "close positions";

If the CPI is weak, he plans to buy at a 10-year Treasury yield level of 4.25%;

At the same time, he advises investors to pay attention to the hedging strategy of VIX longs and S&P 500 shorts in the short term, especially around the release of key inflation data.

Schiavone summarized with his usual "CRIC" [Crisis - Response - Improvement - Complacency] analytical framework, stating that the current issue is the difficulty in determining whether we are in a state of complacency or response. If the Federal Reserve's interest rate cut expectations fall short or inflation data exceeds expectations, the market may face a sharp adjustment.