US equities are caught in a tug-of-war, while a hidden force from the options market is locking the S&P 500's intraday swings into an unusually tight range.
Tony Pasquariello, head of hedge fund business at Goldman Sachs, warned in his latest market macro report that "the current trading environment is not easy." He pointed out that stocks are being squeezed from above by rising oil prices and higher interest rates, while simultaneously supported by corporate earnings growth, resulting in a stalemate. Meanwhile, Goldman Sachs economist David Mericle has added a 25 basis point rate hike at the September FOMC meeting to his forecast, although he personally believes current economic conditions do not present a strong case for tightening.
On the market structure front, Goldman Sachs derivatives strategist Brian Garrett noted that volatility-harvesting strategies centered on "zero-day-to-expiry options" (0-DTE) command a massive footprint. In the absence of intraday catalysts, these strategies force the market into a narrower trading band. Despite high macro uncertainty, Pasquariello maintains a dual bullish stance on energy and technology sectors and lists US fiscal sustainability as the biggest long-term risk for equities.
Zero-Day Options Create a '27-Day Straitjacket'
What surprised Pasquariello is that over the past 27 trading sessions, the S&P 500's intraday trading range has consistently stayed below 1%—the longest streak of low volatility since the onset of the COVID-19 pandemic.
Brian Garrett offered a structural explanation: "This reflects the current market structure. Trading volumes are low and significant news is scarce, giving the options market a more prominent role in intraday trading. The 'yield' strategies in 0-DTE options are massive in the S&P options market. These strategies begin operating from the 9:30 a.m. open and, without intraday catalysts, force the market into a tighter trading range."
Pasquariello summarized this phenomenon: zero-day options can, to a certain extent, "tether" intraday trading ranges, but this suppression is not indefinite. Once a major catalyst emerges, the compressed volatility energy will be released in a concentrated burst.
Rate Hike Expectations Heat Up, But Economic Fundamentals Questioned
On the macro front, Goldman Sachs chief economist David Mericle has incorporated a 25 basis point rate hike at the September Fed meeting into his baseline forecast, but he also clearly stated that such a move lacks strong economic justification.
Mericle believes the portion of inflation exceeding the 2% target can be attributed to one-off factors, whose impact is expected to gradually fade. Core PCE inflation falling to around 2.5% over the past three months is an early signal supporting this view. He also noted that the seemingly broad-based inflation is mainly driven by tariff effects rather than an overheating economy, and inflation expectations are currently not facing an imminent risk of de-anchoring.
Ben Snider, who leads the US portfolio strategy team at Goldman Sachs, analyzed historical stock performance across the past seven rate-hiking cycles: in the first three months after a hike begins, the S&P 500 averages a 2% decline; however, over the subsequent 12 months, it rebounds by an average of 9%. The only major exception was the sharp correction in 2022. Snider's research also shows that the two best-performing sectors in the early stages of hiking cycles are technology and energy.
Tech and Energy: The Core Pair Goldman Sachs Won't Abandon
In his report, Pasquariello emphasized that 2026 is an extremely unusual year, with each week resembling an independent adventure and momentum factors experiencing a series of violent swings. Yet through it all, the combination of going long energy (up 44% year-to-date) and long technology (up 23% year-to-date) continues to generate returns.
On the tech outlook, another Goldman Sachs analyst, Rich Privorotsky, cited insights from industry insiders: "Those at the forefront of the technology tell you that the pace of advancement is astonishingly fast, so much so that they need to actively slow it down. This itself is a massive endorsement of the technology. Safety and alignment issues do exist, and solving them is crucial—the message that 'this thing really works' is embedded in that very warning."
Pasquariello stated that given the current macro dynamics, he is inclined not to abandon the paired strategies of energy-plus-tech, as well as global rates longs combined with equity longs.
Defensive Positioning, Market Sentiment Hits Year-to-Date Low
Looking at positioning data, Goldman Sachs prime brokerage books show current net exposure at the 26th percentile of the past year, with last week's net selling in macro products marking the largest single-week decline since "Liberation Day."
The sentiment indicator from Goldman Sachs US portfolio strategy currently reads -0.5 standard deviations, the lowest since March this year and sitting at the 26th percentile of the past decade.
Pasquariello said he understands why active managers choose to trim risk exposure during a seasonally weak period, and he is aware that systematic funds may be forced to reduce positions further during price declines. Still, he expects the market to complete the necessary adjustment in September and October, laying a solid technical foundation for the final two months of the year.
Fiscal Sustainability Is the Biggest Long-Term Risk for US Stocks
In the report, Pasquariello listed US fiscal sustainability as the biggest long-term risk for US equities, stating bluntly that this issue could ultimately lead to significant tax increases or persistently higher interest rates—neither of which bodes well for stock investors.
He also noted that the Bloomberg Commodity Index (BCOM), despite facing seasonal headwinds, has recently broken strongly above its 2022 high—a signal worth watching.
In Pasquariello's view, the current market is a "coiled, underweighted tape heading into a catalyst-heavy week that the market has spent a month refusing to price." Zero-day options can temporarily suppress intraday volatility, but that suppression has its limits.
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