The bull market in U.S. stocks continues its strong run, but the bond market is sending warning signals. Tony Pasquariello, head of Goldman Sachs' hedge fund business, has proposed a "simplified market direction framework" in a recent report. While affirming the long-term upward trend, he clearly pointed out that movements in the bond market have begun to exert pressure on the stock market and warned that the summer trading environment may become significantly more complex.
Pasquariello noted that the S&P 500 index has risen for eight consecutive weeks, and the Nasdaq 100 index recently recorded one of the highest short-term risk-adjusted returns over the past 40 years, indicating a clear increase in the pursuit of high-leverage assets.
Simultaneously, the bond market is evolving in a way that "typically begins to unsettle the stock market." He anticipates that realized volatility will increase, raising the risk of the market encountering "air pockets" (two-way volatility).
In terms of market impact, Pasquariello advises investors to increase their preference for liquidity in asset allocation, maintain an overall position of "long Delta, long volatility," and hedge equity long exposure with a short position in global bonds.
**Bull Market Thesis Unchanged, Fundamental Support Remains Solid**
Pasquariello began by reiterating his consistent stance: this is a bull market, with the primary trend clearly upward. He referenced the chart of the S&P 500 index's performance during and after the COVID-19 pandemic, suggesting it confirms both the continuity of the primary uptrend and the risk of some near-term consolidation.
From a fundamental perspective, he listed three core arguments for the bullish case: First, earnings are the fundamental driver of the stock market, and current earnings performance is exceptionally strong—first-quarter earnings per share grew 26% year-over-year (including "other income," primarily reflecting private holdings), with double-digit growth expected to continue for some time. Second, the AI capital expenditure supercycle continues to advance, and the scale of this theme remains underestimated by the market. Third, fund flows remain supportive, with U.S. households and corporations consistently entering the market with buy orders daily.
He also cited data on the S&P 500's 12-month forward earnings expectations, pointing out that this metric has doubled since before the COVID-19 pandemic and emphasizing that this growth was achieved despite a series of macroeconomic headwinds. Furthermore, the significant upward movement of S&P 500 dividend swap futures maturing in 2028 during the first-quarter earnings season, which jumped further after NVIDIA increased its dividend from $0.01 to $0.25 per share, also provides evidence of positive fundamentals.
**Near-Term Technical Overheating, Leveraged Funds Pour In**
Despite the clarity of the long-term logic, Pasquariello expressed clear caution regarding the market's short-term structure. He pointed out that the S&P 500's eight-week winning streak and the Nasdaq 100's recent high short-term risk-adjusted return indicate a degree of technical stretch.
Concurrently, the market has recently seen concentrated chasing of high-velocity, elastic assets, including leveraged semiconductor ETFs, short-dated call options on top-performing stocks, and popular thematic basket strategies. Pasquariello believes this large-scale increase in leveraged exposure is a significant signal of accumulating localized risk in the current market.
He concluded that the macro backdrop is not without complexity, and coupled with tight technicals and a large influx of leveraged funds, his intuitive judgment is that "summer trading will be more challenging."
**Bond Market Moves Exert Pressure, Advises Increasing Liquidity and Shorting Global Bonds**
Among all recent risk factors, Pasquariello identified bond market dynamics as the variable most worthy of attention. He explicitly stated that the bond market is currently moving in a way that "typically begins to unsettle the stock market," supporting this with relevant charts.
Based on this assessment, he offered three operational conclusions: First, expect realized volatility to rise, with volatility spreading from the factor level to the index level, presenting a high risk of "air pockets" in both directions. Second, in this context, investors should maintain the ability to move flexibly and increase their preference for liquidity within their portfolios. Third, he maintains the overall position of "long Delta, long volatility" and suggests hedging equity long exposure with a short position in global bonds.
The core logic of this framework is that long-term trends coexist with short-term risks. Investors should neither abandon the long direction due to localized noise nor ignore the risk of increased volatility signaled by current bond market dynamics.
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