AI turbulence, geopolitical escalation..... Panic is everywhere, but the most dangerous is private placement credit?

Every corner of the market is sending warning signals, but Goldman Sachs’ derivatives team believes the most concerning risk isn’t from sharp swings in tech stocks or geopolitical shocks, but from quietly spreading credit cracks.

In a recent weekend report, Goldman Sachs derivatives trader Brian Garrett wrote that February “felt like a year”—market turbulence shifted from individual stocks to index-level volatility, culminating in the first “retreat” in the credit market: The CDX investment-grade credit spreads widened by 5 basis points in a week, the largest weekly increase since last summer, and credit ETF hedge positions’ open interest hit a record high. Garrett bluntly stated, “Among all these signals, the credit ‘retreat’ worries me the most.”

Meanwhile, pressure in the private credit market has begun to spill over into the public markets. On Friday, US bank stocks experienced their worst decline of the year, with the KBW bank index dropping as much as 6 intraday—the biggest single-day fall since the trading turmoil of April last year.

Several private credit funds are facing liquidity issues, prompting Goldman to send letters to investors “clearing their name” and trying to soothe market sentiment.

Panic signals are everywhere, but retail investors remain calm

Garrett pointed out that signs of panic and contagion are “unmistakable in plain sight,” yet retail investors seem largely unaware—he mentioned in the report that he hears almost daily from competitors claiming “retail demand is at the 100th percentile of historical levels.”

Looking at specific indicators, the current market stress is significant. The index skew remains at multi-year highs; implied volatility spreads of individual stocks relative to the index have risen to the highest levels since the 2008 global financial crisis; and open interest in credit ETF hedges has hit record highs.

Garrett noted that three-month put options on the NDX with a -20% strike can fully cover the cost of three-month call options at +10%, meaning the Nasdaq one-month put/call skew is approaching its steepest level since the COVID-19 pandemic, offering relatively attractive structural opportunities for investors willing to bet on a rebound.

Hedge funds accelerate withdrawals, with tech and cyclical sectors hit hardest

Goldman Sachs’ prime brokerage data shows US stocks experienced net selling for the second consecutive week, with the pace of selling accelerating, involving both longs and shorts. Hedge funds’ net selling of individual US stocks has reached its fastest pace since April last year.

Sector-wise, divergence is stark. The Technology, Media, and Telecom (TMT) sector saw net outflows for the second week in a row, with software and semiconductor/semiconductor equipment facing especially heavy selling, exacerbated after Nvidia’s earnings report on Thursday. All US cyclical sectors—energy, materials, industrials, financials, real estate—saw net outflows, falling to -1.9 standard deviations below their five-year average.

In contrast, the healthcare sector experienced net buying by hedge funds for the second week, with longs significantly outnumbering shorts (about 3.5 to 1). Currently, hedge funds are over-allocated to healthcare stocks by more than 12 percentage points above the Russell 3000 index, the highest in five years. Consumer staples also saw net inflows this year, highlighting its defensive appeal.

Credit cracks: spreading from private to public markets

In this market turbulence, a concerning transmission chain is taking shape. Garrett pointed out that panic previously confined to long and short books has now penetrated index levels and ultimately spread to the credit market. Historical data shows that the last time the CDX investment-grade spread traded around its median of 50, the S&P 500 was roughly 1,500 points lower than current levels.

Pressure is especially concentrated in the private credit market. As reported earlier by Wall Street Journal, multiple private credit funds are experiencing liquidity issues, with credit risk and equity risk diverging sharply in recent days.

In response to market panic, Goldman Sachs sent detailed letters to investors on Thursday, endorsing its flagship retail-scale private credit fund. The letter revealed that Goldman Sachs Private Credit’s exposure to enterprise software is about 15.5%, relatively low among peers; redemption rates in Q4 were 3.5%, below industry average.

Vivek Bantwal, co-head of global private credit at Goldman Sachs Asset Management, said in a Friday conference call that diversified funding sources allow for sustained capital deployment throughout the cycle. He also admitted, “If we fully bet on retail channels, the pace of scale expansion would obviously be faster.”

“Heavy assets, low obsolescence”: Goldman bets on a new narrative

Amid intense market volatility, Garrett also shared his directional view, aligning with the “HALO” investment logic—heavy assets, low obsolescence.

He cited a market perspective in his report: “Over the past 20 years, the investment community has operated under the assumption: light assets outperform heavy assets, software outperforms shovels, code outperforms copper wire, and winners can expand infinitely at near-zero marginal cost… This logic is reversing, and reversing rapidly.”

Garrett believes that the $740 billion in capital expenditure planned for 2026 will have clear beneficiaries with strong fundamentals.

In the ETF space, demand for equal-weighted S&P 500 funds (RSP) remains robust. Garrett pointed out that many portfolios currently seek to hold stocks while avoiding over-concentration in the “Magnificent Seven.” RSP’s assets under management have grown nearly 30% over the past three months to about $90 billion, roughly twice the size of the Dow Jones Industrial Average ETF (DIA).

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Market risks are present; invest cautiously. This article does not constitute personal investment advice and does not consider individual users’ specific investment goals, financial situations, or needs. Users should consider whether any opinions, views, or conclusions herein are suitable for their particular circumstances. Invest at your own risk.