Goldman Sachs Warns of Volatility as Tech Stocks Surge

Goldman Sachs has issued a cautionary note regarding the recent surge in U.S. stocks, particularly in the technology sector, which has driven the market to new heights. Tony Pasquariello, the global head of hedge fund coverage at Goldman Sachs, has warned investors to prepare for continued volatility. Despite the strong performance of tech stocks, Pasquariello highlighted two significant concerns: valuation and policy risks.

Pasquariello noted that the market is currently in the middle of a trading range that is expected to last until 2025. He pointed out that the S&P 500 index has recovered almost all of its losses since the "liberation day" declared by Trump, with the VIX volatility index dropping by more than half from its recent peak. However, he cautioned that the market is still 11% below its February high and that the trading environment remains highly unstable.

As Wall Street enters a critical phase with the release of tech stock earnings reports and closely watched employment data, Pasquariello warned that investors are facing one of the most dramatic shifts in market narratives since the 2008-09 financial crisis. He noted that the theme of American exceptionalism, which has been a dominant force in the financial world since 2009 and accelerated during the COVID-19 pandemic, has been reversed in recent months.

Pasquariello emphasized that daily news flows remain highly volatile, with the market reacting strongly to signals from U.S.-China relations and Federal Reserve policy. He described the current situation as being in a "second derivative" stage, where trade policies are leaning towards hawkishness but avoiding extreme outcomes. Despite the noise, technical indicators have turned more positive, with autonomous trading funds and systematic funds turning net positive for the first time in two months and buying into large tech companies like NVIDIA and Meta Platforms.

However, Pasquariello remains cautious on the fundamentals. He stated that market participants are currently weighing the probability of a de-escalation in tensions against the risk of an economic recession. He predicted that the daily "jump up/jump down" price movements will continue, benefiting only the fastest and most agile traders. He also warned that in practice, "buying low and selling high is very difficult."

Pasquariello also revisited the contentious issue of valuations. Despite recent headwinds, the forward price-to-earnings ratio of the S&P 500 index remains around 20 times, a level that many market participants consider unsustainable. However, he urged clients to consider an alternative scenario: "What if the market is right?" To justify current valuations, investors would need to believe in a combination of tariff rollbacks, continued U.S. technological leadership, and economic resilience.

Looking ahead, attention will focus on the earnings reports of major tech stocks. Pasquariello noted that companies like Meta, Microsoft, Alphabet, and Amazon have not abandoned their ambitious capital expenditure plans. He emphasized that the market will closely watch these companies' commitments to maintaining their competitive edge, especially in the accelerating race for general artificial intelligence.

Pasquariello observed that U.S. companies are generally experiencing strategic uncertainty but stressed that the region's resilience and innovation should not be overlooked. He also pointed out additional areas of concern for investors, including the risk of foreign selling of U.S. stocks, signals from initial jobless claims, the vulnerability of the U.S. dollar, and the relative strength of Japanese stocks. He summarized the current situation by asking, "Where is the best place for capital to go now?"