GS Tony Pasquariello Markets and Macro Aug 12

12:45 on Wednesday is the dead midpoint of the trading week in US equities, so here’s a handful of developments that I find notable right now.

all else equal, I’m sticking with the view that the path of least resistance for S&P is higher in August ... then September and October get choppy (supply, seasonals, midterms) ... and that sets things up for a final push into year-end.

1. Q2 earnings. there’s no shortage of impressive statistics or superlatives to describe the reporting period. beneath the surface, I’d argue the breadth of earnings growth is the single most impressive feature of the quarter. to make the point, note that 9-of-11 headline sectors have generated double-digit y/y EPS growth. in addition, the median stock has grown earnings by 14% y/y, which is the highest since the reopening in 2021.

2. a follow-on point. earlier this year, when worries around S&P concentration were building, I asked Ben Snider what the recipe would be for a broadening of the rally (framed from the perspective of “catch-up” vs “catch-down”). his answer: for the market to broaden out, you’d need to see earnings growth broaden out. in a way that directly connects to the prior point, note that every headline sector of the market is now positive YTD, and about half of all sectors have generated double-digit total returns.

3. another follow-on point. it seems that most discussions of S&P concentration are framed as mega cap tech vs everything else (underscore “vs”). given that tension, I think it’s notable that tech is the second best performing sector YTD, up 23%. the simple point I’m trying to make here: the broadening of the rally has NOT come at the expense of the single largest muscle group, which leaves equal weight S&P up a tidy 16% YTD.

4. a final point on this thread. last week I mentioned that S&P earnings growth will likely decelerate some. for good order’s sake, our US portfolio strategy team expects a drop from 24% this year to 13% next year. while one could reasonably assume that a downshift would take some upside convexity out of the market, I don’t want to confuse lower expected returns with a bear market. here I’ll recall an interesting stat: over the last 30 years, there have been 13 occurrences of double-digit earnings growth; in those, S&P is higher in 11 of 13 (for an average total return of 14%).

5. US tech. if there was one other takeaway from the reporting period that struck me, it was the growth rate of cloud revenues for the hyperscalers. part and parcel of that, MSFT and AMZN drew a clearer link between AI capex and ROIC. as long as that linkage exists --

and the stock market rewards it -- I have a hard time seeing any slowdown in spend. if that’s directionally correct, the setup for the infrastructure providers should remain good enough (and, to hinge to the next point, one should also expect that more hyperscaler bonds will be coming off the assembly line).

6. the credit market. I’ll start by underlining our expectation that issuance of IG bonds directly by the hyperscalers will increase 4-fold from 2025 to 2027. as narrated by Amanda Lynam last week, we don’t have significant concerns about their access to capital. furthermore, in the absence of a recession, I have a hard time getting broadly negative on the outlook for credit. with that said, $250bn of bonds this year -- and $400bn of bonds next year -- is a lot of duration to digest for a market that’s not used to jumbo deals with no end in sight (especially in the context of issuance from the broader AI ecosystem). for further reading: link.

7. speaking of supply and demand. for good reason, this note on equity issuance has received a lot of attention: link. again, our expectation is $700bn of US equity supply will come to market this year, including $225bn of IPOs. while those are large figures -- and both would be records in nominal terms -- again one needs to consider the denominator. which is to say, in the context of a US market that’s grown to $80tr, you’re talking about less than 1% of total equity market cap -- which is about in line with the long- term average.

8. hedge fund positioning. I’ve been asked a lot recently to characterize where exposure stands…