GS Tony Pasquariello Markets And Macro July 25

point-to-point, S&P didn’t move all that much this week, yet the degree-of-difficulty in daily navigation was awfully high (as the volatility of momentum remains exceedingly high).

to say it again: there is a glaring disjunction these days between the index and the stocks (or sectors) that comprise it; chart #6 below is another illustration of this dynamic.

stepping back, July has been marked by a sharp rise in factor volatility and corresponding deleveraging -- for some that’s a reason to dial down risk, for others it’s a signal to dial up.

my instincts remain the same: simplify your portfolio and concentrate risk in the highest conviction parts of it.

what follows from here is a check-down of the hot spots, cut into five short points and five charts.

1. GOOG. there were some terrific parts. for example, their profitability is mind bending ($41bn of operating profit, up 30% y/y). one could say the same of their cloud revenues (+82% y/y). further note that nearly 90% of Fortune 100 companies now use Gemini Enterprise. the day was lost, however, as their immense AI capex spend didn’t explicitly link to revenue growth -- so the biggest question of the moment remained unanswered. on the other side of the coin, as we head into another set of critical data points, one can argue the demand picture for the AI infrastructure providers only improved this week.

2. Iran. I don’t know what the value added comment is here -- as usual on matters of geopolitics, particularly this situation, no one has any real edge. with that said, the news is certainly not good, and front month Brent futures have ripped 33% MTD. the core concern this week was not just the escalation of military activity, but also the broadening of it (i.e. the Houthis and the Red Sea). bigger picture, I share the sentiment that neither side is getting what they want, so there will be controlled escalation until someone blinks. my guess is US equities continue to muddle along in this stop / start sequence -- yet, time is again the enemy here, particularly in the absence of tax stimulus that buttressed US household income in Q2.

3. the Fed. at the very start of the week, I heard an argument that the probability of a July hike was even odds, and it felt surprising at the time. by the end of the week, the strip had clearly moved in that direction -- in part given a sudden bias to pay front end rates, in part given a market that’s trying to figure out the reaction function of a new chair. if a hike comes to pass on Wednesday, I admit to an ambivalence on what it means for stocks. on the negative side, the prospect of hikes amidst a massively intense investment cycle is tricky. furthermore, note that Fed tightening is one of the conditions that has marked the peaks of highly valued, highly concentrated markets in the past (link). on the positive side, to the extent that a hike anchors inflation expectations and the back end, that’s not a bad outcome for risky assets.

4. US credit. in a manner that echoes the change in character of the equity market, recent weeks have seen some wear-and-tear in the AI-centric parts of the credit market. in that context, this note from

Amanda Lynam frames the size and scope of what’s playing out in the financing channel, notably the $489bn of AI-related supply that’s already come off the assembly line this year: link. I’ll say it simply: with another fresh data point in hand from this week, there is no plateau in AI capex, and I’m inclined to think that one should not limit their imagination on the willingness of the biggest spenders to keep pushing and pushing. again, now the question for stock operators is whether next week brings any attachment to revenue growth or not (Wed = MSFT, META; Thu = AMZN).

5. a handful of additional quick points:

i. the macro outlook. this week’s podcast features Dom Wilson and Josh Schiffrin, where we hit on all of these hot button issues: link.

ii. Q2 earnings. the single most intense week of the reporting period is upon us. while I understand the frustration with how much oxygen the tech narrative consumes -- obscuring, perhaps, a very respectable 10% expected earnings growth for the MEDIAN stock in S&P -- the fact is those AI…