Goldman Sachs strategist Tony Pasquariello says the US equity bull market primary trend remains higher but flags energy prices as a clear danger and warns risk-reward has deteriorated after a historic Nasdaq rally.

Summary:

• Goldman Sachs strategist Tony Pasquariello told clients on Monday that the primary trend in US equities remains higher, supported by five consecutive weeks of gains that reversed five prior down weeks, driven by resilient economic data, strong earnings and improved sentiment following a ceasefire announcement, per the client note
• First-quarter earnings growth more than doubled expectations, with 61% of S&P 500 companies beating estimates by more than one standard deviation and only 5% missing by that margin, the best such performance outside the 2021 reopening in 25 years, according to Pasquariello
• Goldman’s baseline forecast calls for 2.1% GDP growth and 12% earnings growth, with the S&P 500 seen rising from around 7,200 to 7,600, per the note
• Pasquariello cautioned that risk-reward has become less attractive following the Nasdaq 100’s 15.6% monthly gain, its largest in more than 23 years, and noted that systematic investors have largely completed their buying, according to the note
• The strategist flagged energy prices as a clear-and-present danger to the bullish outlook, and warned that inflation could constrain the Federal Reserve from delivering additional rate cuts, per the client note
• Pasquariello recommended a long delta, long vol positioning construct, advising investors to hold high-conviction names while using cheap options to build hedges, according to Goldman Sachs

Goldman Sachs strategist Tony Pasquariello reaffirmed a bullish outlook for US equities on Monday while delivering a pointed warning that energy prices represent a clear and present danger to that view, as the firm held its S&P 500 target at 7,600 against a backdrop of deteriorating risk-reward following a historic technology rally.

In a note to clients, Pasquariello described the primary trend in US equities as higher, pointing to five consecutive weeks of gains that fully reversed the losses from five prior down weeks. The recovery was driven by a combination of resilient economic data, strong corporate earnings and a lift in market sentiment following a ceasefire announcement. Initial jobless claims hitting their lowest level since 1969 and first-quarter earnings growth that more than doubled expectations added weight to the constructive case, with 61% of S&P 500 companies beating estimates by more than one standard deviation, the best such reading outside the 2021 reopening in 25 years.

Goldman’s baseline calls for 2.1% GDP growth and 12% earnings growth this year, with the S&P 500 climbing from its current level of around 7,200 to 7,600. Pasquariello was unambiguous on the macro direction: it is a bull market and the primary trend is higher.

The caution, however, is real. The Nasdaq 100’s 15.6% monthly gain, its largest in more than 23 years, has consumed the systematic buying that typically amplifies momentum moves, leaving the index without that mechanical tailwind. Risk-reward, Pasquariello said, has become less attractive at current levels. Inflation remains a constraint on the Fed’s ability to cut rates further, limiting a key pillar of the equity bull case.

Most notably, Pasquariello singled out energy prices as a clear-and-present danger, a formulation that places the oil price shock near the top of the risk distribution for US equities. His recommended response was a long delta, long vol construct: maintain exposure to high-conviction positions but use the current period of relatively cheap options to build hedges against a deteriorating scenario.