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Goldman Sachs’ Tony Pasquariello said stocks have had an “exceedingly good run” but investors should be mindful of building risks.
The global head of hedge fund client coverage at Goldman Sachs in a Friday note recounted strong gains for stocks. A “weapon of choice” basket of mega-cap tech stocks has surged 24% since April’s selloff, the tech-focused Nasdaq-100 (NDX)(QQQ) has jumped ~18% YTD, and the S&P 500 (SP500)(SPY)(IVV) has leapt ~34% since October lows, he said.
“Despite all of this well-earned strength and momentum, my instinct is now would be a good time to tap the brakes, a little bit anyways,” Pasquariello said. “More broadly, there are a few gathering risks to the bullish narrative,” he said.
In his list of risks:
- The “ever-worsening fiscal binge”: Pasquariello said this year’s expected deficit of $1.9T marks a widening of $400B from just four months ago. “As the U.S. election cycle takes shape, I worry about the vulnerability of long-dated Treasuries,” he said.
- Continued build-up of exposure in the trading community, regarding positioning of both households and professionals.
- The stock surge from April has been largely led by a small set of stocks. Pasquariello said that’s not something that he wants to fight, but history says the risk of a selloff increases as the rally narrows.
“To be clear, this is not a run-for-the-hills argument … it’s a be-disciplined, hedge-your-tails consideration as the market retains some deep fundamental supports,” he said.
His list of supports:
- U.S. financial conditions are “remarkably friendly” and the core growth/inflation tradeoff should remain favorable, if not improve, as 2024 progresses.
- Structural supremacy of U.S. mega-cap tech stocks, an area where “(for a very long time now) you have been paid to NOT overthink or overcomplicate things,” he said.
- Rule #1 for stock operators: “As long as the economy is growing, and earnings are growing, significant selloffs are very rare,” he said.
Overall, “it’s a bull market, but the probability of a drawdown is rising, so I’d look for places to reduce overall portfolio risk as we navigate the next phase of the political game,” he said. With the cost of insurance low, Pasquariello suggested investors keep their highest quality exposure.
Investors interested in tracking moves in tech stocks, here are a few ETFs: (XLK), (IYW), (VGT), (RSPT), (AIQ), and (XSD).
