Goldman Sachs Strategist: U.S. stocks may experience volatility after Labor Day in September, but strong earnings support the bull market trend remains unchanged.

Tony Pasquariello, head of global hedge fund client business at Goldman Sachs Group, Inc., indicated that the U.S. 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 a report to clients on August 7, Pasquariello pointed out that the S&P 500 index broke out of a consolidation range that lasted for several months, further reinforcing his bullish outlook on the stock market. He expects that the market will come under pressure in September due to an increase in supply and unfavorable seasonal factors, but he believes these factors will not end the overall upward momentum of the market. His core viewpoint is: Both the fundamental backdrop and technical factors support the continuation of the bull market trend on a larger scale. Investors maintain long positions, but positioning has improved Pasquariello indicated that communications with clients and trading activity at Goldman Sachs Group, Inc. suggest that investors still hold net long positions. However, current positions are not as overcrowded as they were at the end of the second quarter. He stated that a meaningful risk transfer in July made the market more balanced as it entered August. This clearer positioning might help explain the resurgence in stock demand as the market rises. With strong demand for upside exposure, the skew in short-term options on the S&P 500 index significantly decreased last week. Option skew refers to the difference in implied volatility (and pricing) between comparable put and call options. Pasquariello noted that last Tuesday, the trading volume of call options for the S&P 500 index hit an all-time high. He pointed out that quick-acting investors had fewer positions at the beginning of August but began buying back in as the market rose. Earnings remain the foundation of the bull market logic Corporate profits are one of Pasquariello's strongest arguments for maintaining a bullish stance. The earnings growth of the S&P 500 index has been unusually strong for seven consecutive quarters. Reports indicate that excluding private companies, the year-on-year earnings growth for the first and second quarters averaged 25%. Goldman Sachs Group, Inc.'s U.S. equity strategy team expects that profits will still achieve double-digit growth next year. Pasquariello stated, The history books are very clear: if you challenge such strong profitability, you will reap the consequences. The question is whether investors will be disappointed when earnings growth inevitably slows. Goldman Sachs Group, Inc. strategist Ben Snyder expects that corporate profit growth will slow next year, due to factors such as a reduction in fiscal stimulus and a slowdown in AI capital expenditure growth. The report noted that AI capital expenditures currently account for approximately half of the earnings growth of the S&P 500 index. As the scale of these investments continues to expand and becomes increasingly reliant on external financing, it will become more difficult to maintain the same growth rate. Despite this, Pasquariello sees reasons for optimism. Historically, a slowdown in earnings growth that still maintains positive growth tends to change the composition of leading sectors in the market rather than changing the overall direction. Additionally, the market is expecting a certain degree of slowdown, which leaves room for corporate performance to exceed expectationsas evidenced by the second-quarter earnings season. NVIDIA Corporation back in the spotlight Pasquariello also notably mentioned NVIDIA Corporation (NVDA.US), which he referred to as a bellwether stock for the current market trend. He pointed out that the recent lack of attention on NVIDIA Corporation has been surprisingly low, both in communications with investors and elsewhere. However, the stock has quietly rebounded 18% from its low point the previous week. Reports indicate that NVIDIA Corporation announced a series of major partnerships at the AI summit in San Francisco at the end of July, including a collaboration with SK Group worth over $500 billion and investments in Naver to deepen AI ecosystem cooperation. NVIDIA Corporation is scheduled to release its earnings report on August 26, coinciding with the Federal Reserves Jackson Hole seminar that week. Pasquariello indicated that market liquidity could deteriorate around these events. These factors combined may make late August a significant test for the current market rally. Rebuilding gold positions Pasquariello also noted that interest in gold was rekindled after it recorded the largest single-day gain in six months last Wednesday. The options market is skewed toward call options, and gold prices have returned above the 50-day moving average. Senior trader Tony Jin at Goldman Sachs Group, Inc. estimates that current positions in gold are at 3, compared to a highly bullish level of 10 in January. Gold positions have risen moderately over the past two weeks. Jin attributes part of this change to the likelihood of the Federal Reserve pushing back the timing of tightening cycles, as well as growing market expectations for a solution to the situation in the Strait of Hormuz. Jin stated that central bank purchases provide a bottom support for gold prices around $4,000, and Chinese speculators have recently returned to the market. An increase in volatility and a weakening correlation between gold, real interest rates, and foreign exchange markets have also boosted market confidence in this rally. He indicated that the main threat to this outlook is a resurgence of conflict between the U.S. and Iran, disrupting energy transportation and pushing oil prices back above $100 per barrel. Hedge funds cut exposure to momentum stocks Pasquariello noted that both systematic hedge funds and fundamental long-short hedge funds have significantly reduced their exposure to momentum stocks. Systematic funds still hold substantial momentum stock exposure, but their leverage has fallen sharply from recent highs. Fundamental long-short funds also made reductions after significant increases in momentum stocks earlier this year. Positioning data further corroborates Pasquariello's broader assessmentthat as investors enter the next phase of the rising market, their positions are not as crowded as they were earlier this year. Pasquariello cautioned that this does not imply that the market will continue to rise. Supply and demand, along with seasonal factors, may cause the market to experience volatility after Labor Day. However, given that corporate profits continue to grow rapidly and that positioning is more balanced, he believes these risks are merely short-term fluctuations that may occur within a bull market, rather than signs of an end to the bull market trend.