S&P Volatility at 3.5%! Goldman Sachs: July Index Unscathed, Deleveraging at 2022 Year-End High, but US Stocks Are Harder to Trade

Goldman Sachs' latest research report indicates that the US stock market in July was not an index collapse but rather a position liquidation. The S&P 500 index volatility was 3.5%, and some indices hit new highs, but AI-related stocks and high-momentum stocks saw significant adjustments. Goldman Sachs' flagship momentum basket had an average daily volatility of nearly 10%, and its TMT momentum basket had a year-to-date gain of 145% as of June 22, followed by the worst correction in history, with a single-day rebound of 17%.

Tony Pasquariello, head of Goldman Sachs' hedge fund business, wrote in the report: 'After high-speed trading experienced a true parabolic rise, a heavy weight has broken through the consensus position over the past month. I tend to think this frenzy has cooled. The focus is not on the disappearance of risk, but on the most crowded, most easily leveraged AI group, high momentum, Korean stocks, and Asian long-short strategies being forced to deleverage.'

Data shows that this wave of deleveraging exceeded normal adjustments. Global technology positions faced the largest selling pressure in over five years. The asset size of South Korean individual stock leverage ETFs plummeted from a June high of $53 billion to $15 billion. Goldman Sachs' main brokerage department reduced it to the lowest level since the end of 2022. Basic fundamental long-short clients' leverage positions on momentum factors fell to the 28th percentile of the past year.

Pasquariello stated that the market has shifted from 'everyone on the train to a significant portion being forced to get off.'

AI trading contradictions have also shifted from narrative to return on investment. The market is questioning when the capital expenditures of super-large cloud service providers, which have reached tens of billions of dollars, will turn into revenue.

Meta has not proven significant returns, Microsoft has given a signal of scaling capital expenditures into revenue, Amazon AWS growth has accelerated again, and cloud service profit margins have expanded. The credit spread of super-large cloud debt has narrowed in sync, and the stage of surging valuations by simply attaching the AI label has temporarily ended, with differentiated pricing returning.

Additionally, after the Federal Reserve (Fed) remained inactive last week, long-term interest rates have become a problem again. The long-end of the US Treasury yield curve has spilled over into the stock market. The Fed's communication has become more restrained, with fewer clues, and trading friction costs have increased. AI and growth stocks are sensitive to long-term discount rates, and if the long end continues to be pressured, 'a stable base' does not mean every day is comfortable.

Currently, the framework conclusion is not pessimistic but is no longer relaxed. With economic and earnings support, nearly $1 trillion in AI spending is still flowing within the system, allowing the S&P to withstand bottom-layer cleaning. However, risk-reward is no longer cheap, and the elasticity of global stock market gains is lower than in the previous stage.

The Nasdaq 100 index in July fell 8% from its June high but is still up 12% for the year, with the P/E ratio falling to a low in recent years. Although the bull market is not over, the 'buy and hold' stage has ended.

Due to poor liquidity this summer and crowded positions easily amplifying volatility, Goldman Sachs advises increasing liquidity and reducing complexity, and not chasing highs. The firm also warned last month that 'the market does not reward crowding and does not forgive leverage.'