Goldman Sachs believes that while the market has experienced fluctuations, it has not yet triggered a true risk repricing.
This week, Tony Pasquariello, Head of Hedge Fund Coverage at Goldman Sachs, emphasized in his latest weekly market observation that while various market risk indicators appear to be under control, the potential downside shocks are far from being fully released. Compared to previous market turbulences in history, equity traders in this round of adjustment have not yet faced a true test.
Pasquariello believes that the best summary of the current market condition is a quote posted on social media by John Arnold, co-chair of Arnold Ventures:
<blockquote>
The beauty of commodity markets is that ultimately the arbiter is not what someone said, but supply and demand itself.
<img src="https://imageproxy.pbkrs.com/https://wpimg-wscn.awtmt.com/bce93954-a680-4a37-8a77-89db55a5a879.png?x-oss-process=image/auto-orient,1/interlace,1/resize,w_1440,h_1440/quality,q_95/format,jpg" alt="Image" original-src="https://imageproxy.pbkrs.com/https://wpimg-wscn.awtmt.com/bce93954-a680-4a37-8a77-89db55a5a879.png"/>
</blockquote>
Furthermore, Pasquariello pointed out that Goldman Sachs data shows that client reductions in holdings in March were the largest in 13 years, and the market entered April in a state of relatively large-scale net short positions.
Despite this, he still explicitly suggests: the current priority is to preserve capital and wait for the next clear entry signal. He stated:
<blockquote>
The opportunities to make big money in a crisis often appear after the crisis.
</blockquote>
<h2>Risk Premium is Moderate, but the &#34;Worst Moment&#34; May Not Have Arrived</h2>
Pasquariello noted that from several quantitative indicators, the &#34;intensity&#34; 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 seen significant widening comparable to historical crisis periods.
<img src="https://imageproxy.pbkrs.com/https://wpimg-wscn.awtmt.com/827f7fe2-5bd8-4de4-9ae5-89e3cb3886a2.png?x-oss-process=image/auto-orient,1/interlace,1/resize,w_1440,h_1440/quality,q_95/format,jpg" alt="Image" original-src="https://imageproxy.pbkrs.com/https://wpimg-wscn.awtmt.com/827f7fe2-5bd8-4de4-9ae5-89e3cb3886a2.png"/>
Pasquariello said:
<blockquote>
I'm not saying March wasn't messy. I'm saying that equity traders haven't really been through a comprehensive test yet.
</blockquote>
Regarding the current resilience of the market, Pasquariello identified two opposing interpretations.
The optimistic side believes that the market has not lost confidence in the sustainability of US economic growth.
Data from Goldman Sachs strategist Ben Snider provides supporting evidence: the S&amp;P 500's earnings per share (EPS) estimates for the next 12 months have been raised by a cumulative 6% from their peak and have risen by 3% since the outbreak of the conflict. The continuous improvement in earnings expectations provides fundamental support for the market.
The concerned side believes that the market is merely over-complacent, and the real shock has yet to arrive.
Tony Kim of Goldman Sachs pointed out that the last batch of oil tankers to pass through the Strait of Hormuz at the end of February has just arrived at their destinations in East Asia and Western Europe. The impact of physical energy supply shortages is truly beginning to brew from now on, and the most explosive convexity range in the rise of energy prices has not yet been released.
Pasquariello admitted to having no full confidence in either the long or short views. The fact that the S&amp;P 500 recorded a strong rebound this week against the backdrop of rising oil prices reflects deep internal contradictions within the market.
<img src="https://imageproxy.pbkrs.com/https://wpimg-wscn.awtmt.com/e394b922-9964-4189-b302-d02a30470e10.png?x-oss-process=image/auto-orient,1/interlace,1/resize,w_1440,h_1440/quality,q_95/format,jpg" alt="Image" original-src="https://imageproxy.pbkrs.com/https://wpimg-wscn.awtmt.com/e394b922-9964-4189-b302-d02a30470e10.png"/>
<h2>Physical Energy Shortage Shocks May Soon Manifest Collectively</h2>
Beyond subjective judgment, Pasquariello cited objective data from Goldman Sachs' own operations.
Goldman Sachs Prime Brokerage data shows that selling by hedge fund clients in March was the highest in nearly 13 years. This means that the trading community significantly reduced long exposure in March and entered April with considerable short positions.
Pasquariello believes that while this data does not guarantee a conclusion in any direction and only represents a specific type of market participant, it shows that the current tactical risk-reward structure is relatively more balanced than it was a month ago.
He attributed the current core contradiction to: the market is facing the largest oil supply disruption in history, yet at the same time, just one major headline is enough to trigger fierce short covering. He calls this state &#34;strategic ambiguity.&#34;
At the volatility level, Pasquariello believes that even if the VIX has peaked, downside and upside tail risks exist simultaneously:
<blockquote>
<ul>
<li>On one hand, if the crisis continues to evolve into a full-blown economic growth shock, downside risks cannot be underestimated;</li>
<li>On the other hand, if there is a &#34;step-down&#34; type of diplomatic or policy breakthrough, the upside tail risk likewise cannot be ignored.</li>
</ul>
</blockquote>
Based on this judgment, he maintains a conservative stance, emphasizing that the current priority is to preserve capital and reserve the capacity to respond to opportunities in the next phase.
<h2>Capital Preservation First, Wait for the Post-Crisis Positioning Window</h2>
Looking ahead, Pasquariello judges that three major themes will continue to dominate the market after risks are resolved:
First, the AI investment craze will not fade. Identifying the direction is easy, but execution is more difficult. Pasquariello stated he will stick to a pair trading strategy of AI leaders versus laggards.
Second, financing demand for power and infrastructure will exceed previous expectations. A pattern similar to 2022 is re-emerging: the structural costs of long-term underinvestment in basic industries and the lack of supply chain diversification are being realized, and the strategic value of energy infrastructure will be further highlighted.
Third, the resilience of the Japanese stock market deserves attention. The Japanese stock market is both a cyclical asset and highly dependent on energy imports, and it is a popular heavy position for traders. Despite multiple unfavorable factors, its performance over the past month has remained impressive. Pasquariello believes that the two themes of AI and defense, which attract capital inflows into Japan, will continue in the next phase.
Concluding with Darwin's theory of evolution, Pasquariello wrapped up this week's market observation:
<blockquote>
It is not the strongest of the species that survives, nor the most intelligent, but the one most responsive to change.
</blockquote>

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Goldman Sachs believes that although the market experienced sharp volatility in March, indicators such as risk premiums, volatility, and credit spreads have not reached historical crisis levels, and equity traders have yet to face a truly comprehensive test. It warns that the impact of physical energy supply shortages is gradually brewing, and the worst may be yet to come. Based on this, he suggests that the current priority is capital preservation, waiting for a clear window for positioning after the crisis

- Goldman Sachs suggests that despite recent market turbulence, a true re-evaluation of risk has not yet occurred.  
- Tony Pasquariello, head of the hedge fund business at Goldman, noted a significant reduction in client exposure, marking the largest in 13 years, with a trend towards bear positions as the potential for energy supply shocks looms.  
- He emphasizes the priority of capital preservation while awaiting clearer entry signals, highlighting that opportunities for significant profits often arise post-crisis, and identifies key themes like AI investment and energy infrastructure that will dominate the market moving forward.

Goldman Sachs Head of Hedge Fund Coverage: No Confidence in Either "Long" or "Short," but the Equity Market's Full Test Is Yet to Come