GS Brian Garrett Weekend Prep July 26

us equity indices are finally starting to take note of the significant volatility that has lived under the surface for weeks … while some metrics of avg stock vol continue to register near the highs, other indicators on our dashboard are no longer ignoring what’s going on at the idiosyncratic level (look no further than SPX skew vs ATM implied)

this week brings two main highlights … earnings and the fed

earnings … 34% of the spx mkt cap reports this week (spx = 1.7% implied move thru friday pm) … major focus will be on the tech spenders (who are now asset heavy companies) as they open the kimono across both 1/ return on invested capital and 2/ future capital expenditure plans … AI capex has been rocket fuel for markets up until now, but investors are starting to push back… credit moved first (hyperscaler basket chart below), cds spreads moved second, hyperscaler individual implied vols have moved third, ndx implied vol has moved fourth, perhaps spx implied vol will move fifth? … msft, meta, qcom, arm, aapl, amzn all this wk

fed … this will be one of the first fed meetings in years where the market does not have at least 80% confidence in what the committee will do (going home friday it was 40% odds of a hike – if current pricing holds this could be the largest “non-cut” surprise in decades link) … while the previous chair made it clear to signal his intentions to the market, the new fed leader is on record as being largely against the practice … the fomc “excess variance” chart was moving tick for tick with hike odds this week … hawkish hold is on my bingo card (i don’t think i’m alone)

trades (vanilla) :: august is almost here and half of wall street will spend the next 3-4 weeks at their respective beaches (brewster, MA is where the quants will go to recharge) … midterms will be on top of mind when participants go green dot on post labor day – gs put out a note on ’26 midterms and equities here – while relatively small realized correlation between “themes” and polymarket odds, i think you need to focus on 1/ crypto currency regulation … 2/ m&a regulation … 3/ healthcare sector (democrat affordability hot button) w/ managed care / medicaid / hospitals most affected … 4/ “green energy” policy (fantastic podcast this week suggesting residential solar is going bid in almost any scenario)

trades (light exo) :: our custom basket team continues to like playing for a rebound in hyperscaler names, but the vol is extremely high … one way to position for a hyperscaler rebound (and sell implied corr) is in outperformance option (call the bottom in both absolute and relative terms) … buy the Sep26 100% strike GSXUHYPR > NDX outperformance call for 5.6% (105% strike costs 3.5%) … make it contingent on NDX up at expiry and the premium is almost cut in half with ATM outperformance @ 3% and 105% @ 1.7%

1/ pb (i) … the us equity book was marginally net bought (+0.1std deviation) as investors keep the book tight heading into earnings … over 30 percent of spx prints this week, US fundamental l/s gross exposure stands in 6th pctl (204.2) and net exposure stands in 22nd percentile (51.7) … those are not the statistics of a market “taking a swing” into EPS season

2/ pb (ii) … the hedge fund community is showing diminishing confidence that the US/Iran conflict will see a quick resolution (though some weekend headlines are hopeful) … gs pb has been buyers of energy equities for the last six consecutive weeks, leaving the HF community net overweight energy vs russell 3k (one of the first times in 5y)

3/ one-delta … the feeling on the cash desk is notably at odds with the high level PB data … prime suggests some small net buying, but the trading desk was very “risk off” into the weekend … momenutum, semis, and AI were all under pressure while low momentum (ie, shorts) squeezed … july has been a long year

4/ futures (i) … desk highlights how the cost in funding sp500 leverage has come in significantly (AXW1 index) … hard to ignore the correlation between equity funding rates and levered etf AUM (chart)

5/ futures (ii) … the cta community has been quiet for months, but we are now below the short term threshold in both SPX, NDX, and SPX … ctas are long $120bn…