Global Markets in Turmoil, Goldman Sachs Asset Manager: Many Outcomes Have Been Revealed, But Questions Remain More Abundant

For market participants, the past week has undoubtedly been a period of "enormous information but chaotic" as described by Tony Pasquariello, an asset manager at Goldman Sachs. Although many key events have settled, the questions left behind seem to be more abundant than answers, making short-term risk-return extremely challenging.

The latest developments show that markets are still struggling to digest multiple conflicting signals. On one hand, new tariff fluctuations and a "clearly terrible" non-farm employment report have cast a shadow over macroeconomic prospects, directly leading to a sharp decline in short-term Treasury yields on Friday.

On the other hand, large-cap tech companies have reported another strong quarterly earnings, but their stock prices' muted reaction suggests that markets have already priced in good news and investors' expectations have become more demanding. Meanwhile, small-cap stocks faced the worst week since a critical period, with a sharp selloff further exacerbating market anxiety.

These conflicting signals, combined with typical summer market low liquidity, form a complex landscape. Although long-term structural factors may remain optimistic, traders are currently facing a challenging trading environment in the short term.

Tech Giants: Strong Earnings Difficult to Conceal Stock Price Fatigue

Last week, large-cap tech companies' earnings reports once again showcased their strong profitability. According to Goldman Sachs' estimates, excluding NVIDIA, the "Tech Seven Giants" saw a 26% year-over-year growth in second-quarter profits, while S&P 500's remaining constituents grew by only 4%. However, such robust performance has not effectively boosted stock prices, Pasquariello believes this reflects market pricing for tech stocks entering a "requiring higher returns" stage.

Contrasting the strong performance of large-cap tech stocks is the severe shortage of breadth in the market. Small-cap stocks' selloff is particularly noteworthy, with Russell 2000 Index (RTY) dropping for five consecutive trading days, resulting in a cumulative decline of 4%, which is the worst single-week performance since last year.

Pasquariello notes that S&P 500's year-to-date returns are largely driven by a few stocks. This high concentration, combined with small-cap stock fatigue, paints a picture of market health being subpar.

Tariff Impact: From "Destructive" to "Distorting"

The tariff issue has returned to the forefront in recent times, bringing new uncertainty to markets. However, Pasquariello observes that most market participants and corporate decision-makers no longer consider tariffs a dominant variable in their decision-making process. A client told him that tariffs are more "distorting" than "destructive."

Although this is the case, the impact of tariffs has already begun to appear in macroeconomic data. Goldman Sachs' economists predict that based on announced measures, the average effective tariff rate for the US will rise by 9 percentage points by year-end and 14-17 percentage points in 2025.

Goldman Sachs' US economist Joseph Briggs expressed deeper concerns, believing that despite markets possibly having already digested tariff expectations, its drag on economic growth and inflationary push effects may become a focus again in the coming months.

Funds Flow Reverses, High-Leverage Risk Eases

In the past two months, healthy funds flow has been a key technical factor supporting markets. However, over the past week, funds flow has clearly turned towards risk aversion. Pasquariello notes that Goldman Sachs' stock business department's funds flow is "clearly biased towards risk avoidance," while macroeconomic consensus trading has suffered heavily.

Looking ahead, the funds flow dynamics will gradually weaken. The report predicts that by August, speculative positioning and individual investor demand may decline. Although corporate buybacks will enter a window period, providing some support, overall funds flow will transition from "main driver" to " gentle pusher."

A positive signal is that previously market concerns about high-leverage risk seem to be easing. According to Goldman Sachs' main brokerage business (GS PB) data, over the past two weeks, the overall leverage level has dropped by the largest amount since June 2023. Pasquariello summarizes that this indicates "the pressure around excessive total risk exposure is now better controlled."

Global Perspective: US Stocks Remain Relative Advantage

In the global asset allocation chessboard, Pasquariello still favors US assets, particularly tech stocks. He notes that although there was a brief market-wide selloff in April, this proved to be a temporary phenomenon, and US tech stocks have once again demonstrated their value in the second-quarter earnings season.

In comparison, European stock markets may perform well this year, with some even outperforming in dollar terms. However, Pasquariello believes that this is more like an "exceptional trade" rather than a "structural story." He predicts that as the European Central Bank concludes its easing cycle, US stocks will reassert their dominance by the second half of 2025.

Regarding China's market, the report acknowledges its strong performance this year, particularly in tech, with the Hang Seng Tech Index rising 22%. However, it also notes that markets are still waiting for domestic consumption to "fully release."

Fed Conundrum: Policy Mistake Risk Reappears

Interestingly, in Pasquariello's analytical framework, the Fed does not appear until point ten. He believes that over the past seven months, there have been numerous major events, but the Fed has remained inert, making it difficult to say whether it is the price driver.

The current core issue facing markets is the same as a year ago: policy mistake risk. Just like Fed Chairman Powell said in April, the Fed may discover itself in a "double-edged sword challenge" – core commodity inflation rising while labor market conditions remain soft.

To traders, Pasquariello's final advice is to focus on market signals. He believes that short-term options have become an important tool for professional fund managers. His final advice is: "If you can buy cheap gamma (volatility risk exposure) in August, I'll grab it."