Goldman Sachs Hedge Fund Business Leader: No confidence in "long and short," but the comprehensive test of the stock market has not yet arrived

Goldman Sachs believes that although the current market has experienced volatility, it has not yet triggered a true re-pricing of risks.

This week, Goldman Sachs hedge fund chief Tony Pasquariello emphasized in the latest weekly market note that current risk indicators in the market seem to be under control, but the potential downside shocks have yet to be fully unleashed. Compared to past market turbulences, stock traders have not yet faced a real test in this round of adjustment.

Pasquariello believes that the best summary of the current market situation is a statement posted on social media by John Arnold, co-chair of Arnold Ventures:

The allure of commodity markets lies in the fact that, ultimately, it’s not about who says what, but about supply and demand itself.

Additionally, Pasquariello pointed out that Goldman Sachs data shows that March saw the largest client de-risking in 13 years, and by April, the market was generally in a large-scale net short position.

Nevertheless, he clearly advises: the top priority now is capital preservation and waiting for a clear entry signal. He states:

The opportunity to make big money in a crisis often comes after the crisis has passed.

Risk premium remains moderate, but the “worst moment” may still be ahead

Pasquariello noted that, based on multiple quantitative indicators, the intensity of this market turbulence is lower than expected.

Forward volatility, the relative performance of cyclical stocks versus defensive stocks, and investment-grade credit spreads have not widened significantly to levels comparable to historical crises.

Pasquariello said:

I’m not saying March was chaos-free. What I mean is, stock traders have not yet truly been tested in a comprehensive way.

Regarding the market’s current resilience, Pasquariello outlined two opposing interpretations.

The optimistic view believes that the market has not lost confidence in the sustainability of U.S. economic growth.

Goldman Sachs strategist Ben Snider’s data supports this, showing that the earnings expectations for the S&P 500 over the next 12 months have been upwardly revised by a total of 6% since the peak, and have increased by 3% since the outbreak of conflict. The continued improvement in earnings forecasts provides a fundamental support for the market.

The concern is that the market is merely overconfident, and the real shock has yet to arrive.

Goldman’s Tony Kim pointed out that the last batch of oil tankers passing through the Strait of Hormuz in late February has just arrived at destinations in East Asia and Western Europe. The physical energy supply shortage shock is now beginning to truly ferment, and the most explosive part of the energy price increase has yet to be unleashed.

Pasquariello admits that he does not have full confidence in either bullish or bearish views. This week, the S&P 500 rebounded strongly despite rising oil prices, reflecting deep internal contradictions within the market itself.

Physical energy shortages may soon become more apparent

Beyond subjective judgment, Pasquariello cited objective data from Goldman Sachs’ own operations.

Goldman Sachs prime brokerage data shows that hedge fund clients’ selling in March was the largest in nearly 13 years. This indicates that the trading community had significantly reduced long positions in March and entered April with substantial short positions.

Pasquariello believes that, although this data does not guarantee any particular direction and only reflects certain types of market participants, it indicates that the current tactical risk-reward structure has become relatively more balanced compared to a month ago.

He summarizes the core contradiction as: the market is facing the largest-ever disruption in oil supply, yet a major headline can trigger fierce short covering. He calls this state “strategic ambiguity.”

In terms of volatility, Pasquariello believes that even if the VIX has peaked, downside and upside tail risks still coexist:

• On one hand, if the crisis continues to evolve into a full-blown economic growth shock, downside risks should not be underestimated;
• On the other hand, if there is a “step-down” style diplomatic or policy turnaround, upside tail risks should also not be ignored.

Based on this judgment, he maintains a conservative stance, emphasizing that the current priority is capital preservation and reserving capacity for opportunities in the next phase.

Capital preservation first, waiting for a window to position after the crisis

Looking ahead, Pasquariello believes three major themes will continue to dominate the market once risks are resolved:

First, the AI investment boom will not fade. Identifying the direction is easy, but execution is more difficult. Pasquariello says he will stick to a pair trading strategy favoring AI leaders over laggards.

Second, the demand for power and infrastructure financing will exceed previous expectations. Similar to the pattern seen in 2022, structural costs of long-term investments in basic industries and lack of diversification in supply chains are coming to the fore, further highlighting the strategic value of energy infrastructure.

Third, the resilience of the Japanese stock market deserves attention. Japan’s stock market is both cyclical and highly dependent on energy imports, and is widely held by traders. Despite multiple adverse factors, its performance over the past month has been impressive. Pasquariello believes that the next phase will continue to attract capital inflows into Japan’s AI and defense sectors.

To conclude with Darwin’s theory of evolution, Pasquariello wraps up this week’s market observation:

The survival of the fittest is not about the strongest or the smartest, but about those most adaptable to change.