Goldman Sachs Strategist: U.S. Stocks May Face Volatility After September Labor Day, but Strong Earnings Continue to Support Bull Market

Zhitong Finance APP reported that Tony Pasquariello, Head of Global Hedge Fund Client Business at Goldman Sachs, stated that the US stock market may face a more challenging period after Labor Day (the first Monday in September), but strong corporate earnings and favorable technical conditions should support the continuation of the overall bull market trend.

In his client report dated August 7th, Pasquariello noted that the S&P 500 Index broke out of a months-long consolidation range, further reinforcing his bullish view on the stock market. He expects that the market will be under pressure in September due to increased supply and unfavorable seasonal factors, but he does not believe these factors will end the overall upward momentum in equities.

His core view is: "Both the fundamental background and technical factors support the continuation of the bull market trend on a larger scale."

Investors remain long, but positions are more balanced

Pasquariello said that communication with clients and Goldman Sachs trading activity indicate that investors are still holding net long positions. However, current positioning is no longer as crowded as at the end of the second quarter. He indicated that significant “risk transfer” in July made the market more balanced as it entered August.

This clearer position configuration may help explain the renewed demand for equities as the market rises. Amid strong demand for upside exposure, the skew of short-term S&P 500 options fell sharply last week. Option skew refers to the difference in implied volatility (and pricing) between comparable put and call options.

Pasquariello said that last Tuesday, the trading volume of S&P 500 call options hit an all-time high. He pointed out that nimble investors had lighter positions at the beginning of August, but started buying back as equities rose.

Earnings remain the cornerstone of the bull market logic

Corporate profits are one of the strongest arguments behind Pasquariello’s persistent bullishness. S&P 500 earnings growth has been exceptionally strong for seven consecutive quarters. The report shows that excluding private companies, the year-on-year earnings growth for the first and second quarters averaged 25%.

Goldman Sachs’s US Portfolio Strategy team expects double-digit earnings growth again next year. Pasquariello said, “History is very clear: those who challenge such powerful earning power do so at their own peril.”

The question, however, is whether investors will be disappointed when earnings growth inevitably slows. Goldman Sachs strategist Ben Snider expects corporate earnings growth to slow next year due to weaker fiscal stimulus and a slowdown in artificial intelligence (AI) capital expenditures.

The report notes that AI capex currently accounts for about half of the S&P 500's earnings growth. As these investments expand and rely increasingly on external financing, maintaining the same growth rate will become more difficult.

Nevertheless, Pasquariello still sees reasons for optimism. From historical experience, when earnings growth slows but remains positive, it tends to change the market's leadership sectors rather than the overall direction.

Additionally, consensus is already pricing in some degree of slowdown, allowing room for corporate earnings to surprise on the upside—as was the case in the second-quarter earnings season.

Nvidia returns to the spotlight

Pasquariello also highlighted Nvidia (NVDA.US), which he called the bellwether stock in the current market. He noted that Nvidia has received surprisingly little attention lately, even in discussions with investors. However, the stock quietly rebounded 18% from its lows the previous week.

Reportedly, at the end of July, Nvidia announced a series of major partnerships at the San Francisco AI Summit, including a deal exceeding $500 billion with SK Group, an investment in Naver, and deeper AI ecosystem collaboration.

Nvidia is scheduled to report earnings on August 26, the same week as the Federal Reserve’s Jackson Hole Symposium. Pasquariello said that market liquidity could worsen around these events. The combination of these factors could make late August a crucial test of the current market rally.

Rebuilding gold positions

Pasquariello also pointed out that after gold posted its largest single-day gain in six months last Wednesday, investor interest in gold was rekindled. The options market is leaning toward calls, and gold prices have moved back above the 50-day moving average.

Goldman Sachs senior trader Tony King estimates that the current positioning on gold is at 3, compared with a highly bullish 10 in January.

Gold positioning has risen moderately in the past two weeks. King attributed the change partly to a further delay in the Fed’s tightening cycle and rising expectations for a resolution to the Strait of Hormuz situation.

King said that central bank gold purchases provide strong support for gold at around $4,000, and Chinese speculators recently returned to the market. Rising volatility, as well as gold’s weakening correlation with real interest rates and forex markets, have also boosted market confidence in this round of gains.

King noted that the main risk to this outlook would be renewed conflict between the US and Iran, disrupting energy transport and pushing oil prices back above $100 per barrel.

Hedge funds cut exposure to momentum stocks

Pasquariello said that both systematic and fundamental long-short hedge funds have significantly reduced their exposure to momentum stocks. Systematic funds still hold considerable exposure, but leverage has pulled back sharply from recent highs. Fundamental long-short funds also cut back after a surge in momentum exposure earlier this year.

Positioning data further supports Pasquariello’s broader view—that as investors enter the next phase of the rally, their holdings are not as crowded as earlier in the year.

Pasquariello cautioned that this does not mean the market will keep rising. Supply-demand dynamics and seasonal factors may cause the market to “become more volatile” after Labor Day. But given the continued strong earnings growth and more balanced positioning, Pasquariello sees these risks as brief fluctuations within a bull market—not signs of a trend reversal.