While the S&P 500 index showed limited net change this week, intense internal divergence and factor volatility within the market are testing every investor's judgment.
In his latest market macro report, Goldman Sachs Head of Hedge Fund Sales Tony Pasquariello noted that the current market environment "remains extremely difficult to trade" due to persistently high momentum volatility. He recommends closely monitoring a historical analogy: the typical pattern of S&P 500 volatility leading up to midterm elections.
Where to Begin
Pasquariello stated that factor volatility has surged sharply since July, with significant market deleveraging. The core strategy for investors should be to "simplify portfolios and concentrate risk into positions with the highest conviction."
Meanwhile, his assessment of gold has notably shifted. He believes that a large number of speculative long positions have been washed out since 2026, combined with the resumption of central bank gold purchases and prices finding support multiple times around the $4,000 level. This, he argues, makes it an appropriate time to establish structural long positions.
In terms of market impact, Pasquariello's view encompasses multiple variables, including rising expectations of Fed rate hikes, concerns over the disconnect between expanding AI capital expenditure and revenue growth, and the Iran situation pushing Brent crude oil up 33% month-to-date. Together, these factors form potential catalysts for increased volatility in US stocks over the coming weeks.
Increased Internal Divergence Beneath Index Calm
The S&P 500 index showed limited point-to-point movement this week, but this surface calm masks significant internal turmoil.
Pasquariello pointed to a "significant divergence" between individual stocks and the index – the spread between single-stock implied volatility and index implied volatility continues to widen. This is specifically reflected in the comparison data for 1-month, 25-delta call options.
He believes this phenomenon reflects three market themes: persistently strong demand for single-stock options relative to index options; very high participation in the options market by all types of investors, both institutional and retail; and an exceptionally rich opportunity window for dispersion trading.
Pasquariello expects this spread to remain elevated in the near term.
Realized volatility for momentum factors has also surged dramatically, and this is not limited to the US market. Volatility for Japan's momentum factor has also jumped in tandem, reflecting the widespread penetration of AI-related exposure across global markets.
Gold: The Time to Build Positions on Dips Has Arrived
Pasquariello's view on gold is the most definitive investment recommendation in this week's report. He offers four logical supports:
First, a large number of speculative long positions have been cleared out since 2026.
Second, central bank gold purchases have restarted.
Third, gold price charts show support forming multiple times around the $4,000 level.
Fourth, while rising US interest rates and a stronger US dollar create short-term headwinds, this precisely creates an opportunity to add to structural long positions on dips. He is deeply convinced of the long-term logic for this direction, based on the core thesis of the ongoing upward trend in global government debt burdens.
Goldman Sachs believes the risk to its medium-term gold price forecast is skewed to the upside. Gold's allocation in private portfolios remains low, while recent geopolitical events, including the situation in Iran and broader tensions, could accelerate private investors' diversification needs and put pressure on market expectations for Western fiscal sustainability.
AI Capital Expenditure: Frenzy Continues, Revenue Linkage Remains Unresolved
The scale and pace of AI infrastructure investment continue to dominate the market narrative.
Pasquariello noted that AI-related credit supply has reached $489 billion year-to-date, with no signs of slowing down. He stated, "The willingness of the largest spenders to keep committing capital should not be underestimated."
However, this week's Google earnings report highlighted the market's core contradiction. The company reported operating profit of $41 billion, up 30% year-over-year, with cloud revenue up 82% year-over-year. Nearly 90% of Fortune 100 companies are already using Gemini Enterprise. But the massive AI capital expenditure has not been clearly linked to revenue growth, leaving the market's most critical question still unanswered.
Pasquariello emphasized that the earnings reports from Microsoft Corp (NASDAQ: MSFT) on Wednesday, Meta Platforms Inc (NASDAQ: META) on Wednesday, and Amazon.com Inc (NASDAQ: AMZN) on Thursday next week will be the next key test. The market needs to see a clear connection between AI investment and revenue growth. Notably, AI infrastructure-related companies are expected to contribute more than half of the total S&P 500 earnings growth this quarter, even as the median S&P 500 stock is also expected to see earnings growth of about 10%.
Two Key External Variables Heat Up: The Fed and Iran
Uncertainty around the Fed's policy path has clearly increased this week.
Pasquariello noted that the market's probability for a July rate hike was a surprise at the start of the week, but by the weekend, interest rate swap markets had clearly tilted towards a rate hike scenario. This is partly because the market is trying to gauge the new Chair's policy reaction function.
He admitted to having "mixed feelings" about the impact of rate hikes on equities. On the negative side, tightening monetary policy amid a high-density capital expenditure cycle carries risks, and historically, Fed tightening has been one of the conditions for peaking in high-valuation, high-concentration markets. On the positive side, if rate hikes can anchor inflation expectations and suppress long-end yields, they may not necessarily be bad for risk assets.
Regarding the Iran situation, Brent crude oil front-month futures have risen 33% this month.
Pasquariello said the market's core concern this week is not just the escalation of military conflict itself, but also the expansion of the conflict's scope – the involvement of the Houthis and the Red Sea situation has made the situation more complex. He judges that neither side has achieved its expected goals, and the situation will remain in a state of "controlled escalation" until one side concedes.
Key Coordinates for the Next Phase: Fund Flows and Volatility
From a fund flow perspective, Pasquariello believes the overall bias for the next month is positive.
Three large financing transactions totaling $163 billion over the past five weeks have been absorbed, and the scale of new capital raised in August is expected to be significantly lower than the previous period. Meanwhile, as the earnings season draws to a close, stock buybacks are expected to accelerate significantly – August has historically been the month with the highest proportion of full-year buyback expenditure.
In terms of volatility outlook, Pasquariello specifically highlighted a historical analogy. The typical pattern of S&P 500 realized volatility before midterm elections shows a regular tightening around October. He said, "It's conceivable that the market will also tighten up around that time this time," although extreme years like 1987 or 2008 serve as a reminder that election cycles are not the sole driver of volatility.
Additionally, Apple Inc (NASDAQ: AAPL) has seen its share price surge recently, vying with Nvidia Corp (NASDAQ: NVDA) for the title of the largest US company by market cap. However, its realized correlation with the Nasdaq 100 index has fallen to its lowest level in at least 20 years – another anomalous signal worth market participants' attention.
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