Goldman Sachs trading head flags stock difficulty, backs gold at $4,000

Goldman Sachs' Tony Pasquariello told clients the US stock market has become "extremely difficult to trade" and recommended building gold positions on any pullback.

Goldman Sachs' Tony Pasquariello said the S&P 500's calm surface masks extreme internal divergence, with momentum volatility at elevated levels.

"The difficulty of trading this market is extremely high because momentum volatility remains very elevated," Pasquariello, head of hedge fund business at Goldman Sachs, said in a weekly market report.

The divergence between single-stock and index implied volatility has widened, with the spread on 1-month, 25-delta call options persisting. Pasquariello attributed this to sustained demand for single-stock options across institutional and retail investors, alongside unusually rich dispersion trading opportunities. Momentum factor realized volatility has also spiked, extending beyond US markets to Japan, reflecting the global reach of AI-related positioning.

The warning comes as investors navigate multiple cross-currents: Federal Reserve rate hike expectations have shifted, with swaps now pricing in a greater chance of tightening; Brent crude has surged 33% month-to-date on Iran tensions; and AI capital expenditure has reached $489 billion year-to-date without clear revenue linkage, as Google's earnings highlighted this week.

Gold's Turn

Pasquariello's most decisive call was on gold. He cited four factors supporting a structural long position: speculative longs have been largely washed out since early 2026, central bank gold purchases have resumed, the metal has repeatedly found support near $4,000, and while higher US rates and a stronger dollar create near-term headwinds, those conditions offer dip-buying opportunities. The core thesis rests on the trajectory of global government debt, he said. Goldman sees upside risk to its medium-term gold price forecast, noting that private portfolio allocations to gold remain low and recent geopolitical events could accelerate diversification into the metal.

AI's Revenue Question

AI infrastructure investment shows no sign of slowing, with $489 billion in related credit supply arranged year-to-date. "Don't underestimate the willingness of the largest spenders to keep going," Pasquariello said. But Google's earnings this week laid bare the market's central tension: operating profit reached $41 billion, up 30% from a year earlier, and cloud revenue jumped 82%, with 90% of Fortune 100 companies using Gemini Enterprise — yet massive AI capital expenditure has not been clearly tied to revenue growth. The question remains unresolved ahead of earnings from Microsoft, Meta and Amazon due next week. AI infrastructure companies are expected to contribute more than half of S&P 500 earnings growth this quarter, even as the median stock in the index is also delivering roughly 10% profit growth.

Cross-Currents Intensify

The Federal Reserve's policy path has become less certain. Rate swaps shifted toward pricing in a July hike as the market tries to gauge the new chair's reaction function. Pasquariello said he holds "ambivalent" views on what tighter policy means for equities: tightening during a heavy capital expenditure cycle carries risks, and historically, Fed tightening has coincided with peaks in high-valuation, high-concentration markets — but if rate hikes anchor inflation expectations and cap long-end yields, the impact on risk assets may be manageable.

On oil, Brent crude's front-month contract has gained 33% this month as Iran tensions escalate. The market's primary concern, Pasquariello said, is not just the risk of direct military conflict but the expanding theater — Houthi involvement and Red Sea disruptions have added layers of complexity. He expects a "controlled escalation" scenario until one side concedes.

Positioning and the Path Ahead

The flow picture for the coming month looks broadly supportive, Pasquariello said. Three large financing deals totaling $163 billion have been absorbed over the past five weeks, and August capital-raising volumes are expected to fall sharply. With earnings season winding down, share buybacks — which historically peak in August — should accelerate significantly.

On volatility, Pasquariello flagged a historical pattern: S&P 500 realized volatility tends to tighten ahead of midterm elections, typically around October. "One can imagine the market tightening up again this time around," he said, while cautioning that extreme years such as 1987 and 2008 show election cycles are not the only driver.

Apple's recent price surge has pushed it into a neck-and-neck battle with Nvidia for the largest US market capitalization, but its realized correlation with the Nasdaq 100 has fallen to its lowest level in at least 20 years — an anomaly worth watching, Pasquariello said.

This article is for informational purposes only and does not constitute investment advice.