GS Tony Pasquariello - Short thoughts on the big questions that I kicked around this weekpdf
GS Tony Pasquariello - Short thoughts on the big questions that I kicked around this weekpdf
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  1. short thoughts on the big questions that I kicked around this week:1. what’s the general outlook for the rest of 2024? if GS is correct on the big calls, the macro backdrop is set to remain friendly: the US economy should continue to grow nicely above trend --picking up speed as the year moves along --with three adjustment rates cuts along the way. to not obscure themoral of that story: the Fed is set to ease policy ... into an upswing. while Fedspeak this week had a somewhat hawkish bent, the house view for 2024 remains intact (link). 2. is that story lost on the markets? I don’t think so. while the major indices bumped around this week, if you look at recent price action in commodities and cyclical stocks, there’s a fairly clear pattern of reflation playing through (the end of this note digs into this specific point).while market dialogue in recent months has often centered around the downside risks, following payrolls and the recent set of global manufacturing data, I found myself wondering if we should be asking the opposite question: what’s the playbook if nominal growth is inflecting higher?3. where I come out: the macro backdrop is alluring, but not uncomplicated for S&P. in addition, since the October lows, US equities have added --ahem --$12 tr of market cap. therefore, to say it again, I want to be sober as risk/reward has changed. the plan: stay in the fight, but simplify your portfolio to the highest conviction components ... with consideration for a more reflationary tone, preference cyclicals over defensives ... and take advantage of (still) low implied volatility to add options to risk-manage along the path. 4. when do higher rates begin to bite? this was the most asked question of the week. with credit to Ben Snider, the history book suggests that a 2 standard deviation move in US 10-year note yields --equivalent to around 60 bps today --over a month is when impingement really kicks in. given we closed the books at 4.20% last week, this simple rule of thumb argues that a move towards 4.80% is where things would get tricky for stocks.5. will the market continue to broaden out? this was fully in effect through Q1. of the 11 headline sectors, 5 were up more than 10%; while that included tech and communication services, note that energy, industrials and financials were also very strong. here I’ll again reference our work on highly concentrated markets: just because the index is top heavy, the history book doesn’t suggest that it needs to topple over (link). rather, at some point the momentum factor usually breaks down, ideally as laggards catch up (and distinct from the leaders catching down), which I would characterize as a form of broadening. with this said, I don’t think it includes all parts of the market, which leads to the next point.6. what’s the outlook for small cap? yes, it had genuine moments of strength in February and March. that said, to steal a line from Bill Parcells, “you are what your record says you are,” and RTY has generated less than ...1 /4ththe return of S&P this year. while small cap should perform well if the core GS macro view is correct, I still can’t get to a place where I want to sell the most powerful companies in the market to buy it. I’ll come back to another point: S&P encompasses 75% of the total market cap of US equities ... RTY encompasses 5% ... I think it receives way too much attention relative to its actual standing in the market.
  2. 7. what’s the positioning setup? the trading community is long. on a scale of -10 to +10, I’d put current length at +7. to unpack that: the systematic crowd is near max long ... the discretionary crowd is carrying about as much length as they have at any point in the past year ... and the retail crowd has been on the bid all year long. so, while this is not 2021-grade levels of euphoria, folks do have some decent skin in the game. if there’s a counterpunch here, it’s what I sent last week on buybacks --$1tr of executions, on average, over the next two years --while noting that we need to get through the core of Q1 earnings before those switches are fully flipped on.8. what’s the setup for mega cap tech in Q1 earnings? this varies considerably given realized dispersion, be it within the largest names (e.g. NVDA vs TSLA) or across different baskets (e.g. mega cap tech +25% vs non-profitable tech -18%). with that said, I think the bar is pretty high for the best names,particularly given the fact that mega cap tech blew the doors off the field in the Q3 and Q4 reporting periods. what I’m trying to say here: I wouldn’t constrain my imagination around where these stockscould go medium-term, but I suspect they will display less upside convexity in the coming earnings period, and I tend to think the reporting period will favor stock picking over big index moves.9. to end where I started:the key story line this week was the rip higher in commodities, interspersed with pockets of pressure on the bond market.along the way, equities didn’t necessarily enjoy the local turbulence, which I get. when I look at our forecasts, however, again the call is for the US economy to pick up speed as the year moves along --with Q1 being the low point in the sequence. along that path, the Fed --amongst other DM central banks --is expected to deliver a series of cuts (some perceived as optional, others not). in that specific context, when I look at the assets illustrated below, the macro complex is doing what it should be doing. which is to say: price action is consistent with a REFLATION TRADE, featuring stronger-than-expected NOMINAL GDP growth. while that is arguably complicated for certain parts of the equity market ... and, not what I would have expected to be writing at this stage of the cycle ... I think it’s ultimately fine for risky assets, but perhaps vol-inducing along the way (with attendant mix and correlation shifts).
  3. US cyclicals vs defensives:GS inflation comeback basket (fwiw, I think the next phase of the game is more about reflation than inflation, more info available):
  4. equities with leverage to copper:plain old copper:
  5. plain old gold:plain old crude oil:
  6. the long bond yield:US breakeven inflation rates (10s):
  7. source for all data: Bloomberg as of 5Apr24. past performance is not indicative of future results. all references to "we/us/our" refer to the views and observations of the desk.Tony PasquarielloGoldman Sachs
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