Stay vigilant, Goldman Sachs' top traders say they are expecting "a tumultuous month ahead," with the possibility of the U.S. economy not "landing."

Goldman Sachs' top trader and head of hedge fund research, Tony Pasquariello, said that the dominant market narrative has been highly volatile in recent months, but his basic stance remains unchanged: to minimize the risk of asset quality and "remain vigilant in the noise of the next month."

Pasquariello mentioned that the dominant narrative fluctuations in recent months include: the explosive rise of tech stocks in July, the VAR impact at the beginning of August, the aggressive moves by the People's Bank of China in September, the mixed reactions of US stocks after the Fed rate cut in September, with Nvidia rising by 4% and the small-cap Russell 2000 index falling by 1%. He said that there is nothing extraordinary about this, but a potential pattern can be seen: this is a trader's market, with risk/reward being uncertain for the past three months, yet the S&P 500 index continues to moderately hit new highs.

Pasquariello believes that this is fundamentally consistent with the downside tail being weakened by rate cuts and prolonged economic weakness, while the upside tail is constrained by recent political and geopolitical uncertainties, with capital flows favoring the bulls. Price trends indicate that this is a market that continues to be bought into.

Pasquariello mentioned some key market variables as follows.

US Economic Growth

Pasquariello believes that there has been little progress in this area this week, but he emphasizes that Goldman Sachs' US economic surprise index is at its highest level in the past six months.

Wall Street CN mentioned earlier this week that the strong non-farm payroll growth reported last Friday, along with rising inflation and concerns about Fed tightening, has led to discussions on whether "good news is really good news" as mixed signals emerge, and the argument that the US economy will not "land" has resurfaced.

Pasquariello points out that the performance of the aforementioned Goldman Sachs index broadly aligns with the "no landing" view, also reflected in Goldman Sachs' forecasts for US GDP growth: expected growth of 3.2% in the third quarter of this year, 2.1% in the fourth quarter, and 2.8% for the whole year.

Federal Reserve

Following the heavy losses in the US bond market last week, the rate cuts of 25 basis points each at the November and December FOMC meetings somewhat reflect Goldman Sachs' baseline forecast, which is likely also the Fed's baseline forecast.

Therefore, stock operators can still envision a well-ordered adjustment to the Fed's rate cut curve, different from a significant rate cut—Pasquariello believes this is enough to support the major trend.

Capital Flows/Positions

In the specific context of the US, there have been no significant changes in capital flows recently—however, there are evidently some ongoing demands within the market (which is the natural order of things) Looking ahead, what makes Pasquariello nervous is that both hedge funds and American households are under tremendous pressure in the trading world. In fact, November and December are the two best months of the year for stock buybacks.

U.S. Consumers

On one hand, the employment report is undoubtedly good news for American consumers; on the other hand, fluctuations in micro data points are usually accompanied by stock price declines. Pasquariello also acknowledges this tense relationship:

This makes him feel that he may be more willing to be optimistic about American consumption in the broader market, rather than just focusing on non-essential consumer categories, but I still like the risk/return profile of the S&P 500 non-essential consumer goods sector (S5COND).

U.S. Technology

Pasquariello mentioned two key points. One is fund flows: hedge funds sold tech stocks for five consecutive months, bought heavily last week, and then bought individual tech stocks and index futures at a faster pace this week.

The other thing is the price movements of companies like NVIDIA compared to Amazon or Microsoft, showing a significant dispersion within the tech sector. Therefore, the Nasdaq 100 index is only 2% below its high. And we are about to enter a crucial third-quarter earnings season.

U.S. Small Caps

The Federal Reserve has been actively weakening economic growth, China is stimulating its economy, yet U.S. small-cap stocks are underperforming.

Pasquariello believes that the market is clearly showing its strength here - and there are better options available.

U.S. Elections

Pasquariello said that he knows many well-informed individuals have very strong beliefs about the election results, with significant differences, and he firmly believes: the election results are like flipping a coin on November 5th.

In this scenario, he is curious about how much risk premium will be released after the election. By observing the term structure of the S&P volatility, it can be seen that this tension may persist until the election results are clear.

Japan

Currently, international capital has not flowed into Japan, investors have become cautious after the volatility shock in August, and there have apparently been better investment choices since then, but this week the Japanese stock market still slightly outperformed.

Pasquariello still favors well-performing core themes - especially buyback baskets and defensive stocks, while avoiding large directional bullish bets on major indices.

Net Zero Carbon Emissions Delay

Pasquariello mentioned that he saw a report proposing a delay in the expected timeline for achieving net zero carbon emissions, which was the most interesting report he read this week. The report stated that the expected path to net zero carbon emissions launched in June 2021 has been updated, reflecting an increase in carbon emissions and coal usage since the energy crisis of 2022. The report now believes that the lifespan of hydrocarbon assets is longer, the peak oil demand will occur after 2030, and the demand for natural gas as a transitional fuel will increase until 2050.

Finally, Pasquariello mentioned a quote he saw this week, which roughly translates to, compared to other choices, America's profligacy may not necessarily be a bad policy. The U.S. has been overspending for decades, but the private sector continues to expand, innovate, and create globally leading companies Therefore, the United States is subsidizing the soon-to-retire baby boomer generation, rebuilding global supply chains with reliable allies, and making massive investments in the life-and-death artificial intelligence (AI) competition. If this plan doesn't fail, it's fine, but if it fails, it will be a disaster