Goldman Sachs trader: The craziness of the market this week has exceeded all expectations.

Last week, the market experienced the most severe sell-off since the pandemic in March 2020, with the S&P 500 index dropping over 9% in a single week. In response, Goldman Sachs traders bluntly stated that the market's madness "exceeded everyone's expectations". Goldman Sachs' top trader, John Flood, said in a client briefing on Sunday that the market may not have bottomed out yet, as the negative impact of global tariff escalation on GDP growth, corporate profits, and inflation is just beginning to show. Market volatility will continue, and it may not have reached the near-term/mid-term low point on an index basis. However, he noted that Goldman Sachs data shows that when market sentiment reaches extremely low levels, there is a 70% chance of positive returns for the S&P 500 in the next two weeks. Epic sell-off: Market faces an unstoppable storm According to John Flood's briefing, last week's market fluctuations exceeded everyone's expectations. The volatility markets originally expected a weekly fluctuation of 2.6% for the S&P 500, but the actual drop was staggering at 9.08%. On April 3 (Thursday), the S&P 500 fell 4.84%, marking its worst single-day performance since June 11, 2020, and then dropped 5.97% on April 4 (Friday), the worst trading day since falling 11.98% during the lockdown period of the new crown epidemic on March 16, 2020. Thursday and Friday last week became the busiest period in U.S. stock market history. According to statistics, the trading volume in the U.S. stock market on April 4 reached a historical high, with a total of 26.6 billion shares traded on all U.S. stock exchanges, breaking the previous record of 23.67 billion shares set during the GameStop frenzy on January 27, 2021. Goldman Sachs data shows that April 3 and April 4 will also be the busiest two days in the history of the Delta trades based on traded shares. According to Goldman Sachs' statistics, hedge funds had a decent performance on April 3, but significantly worsened on April 4 (fundamental long/short hedge funds fell by 2.7%, their worst performance since January 27, 2021). Unprecedented intensity of sell-off: Institutional investors massively reduce positions Data from Goldman Sachs Prime Brokerage shows that last week (excluding trading on April 4) hedge funds have sold a record amount of global stocks since 2010, mainly driven by short selling, with relatively fewer instances of selling long positions (ratio of 8:1). Nominal short sales last week also set a record high. Hedge funds net sold global financial stocks at the second-fastest pace since 2016. U.S. macro products (index+ETFs) face the largest nominal short sales ever recorded, as hedge funds actively increase hedging positions during market downturns. Long-term institutional investors sold off in a stable and orderly manner on Thursday (all day) and Friday (more sporadic and larger scale, with some requests for additional funds). Supply was mainly concentrated in the financial, industrial, and technology sectors. Goldman Sachs data shows that mutual funds currently hold a historically low level of cash (1.5% of total assets under management) and have been buying financial stocks in large quantities since the beginning of this year. Therefore, one needs to be cautious of further selling pressure from this group. Market outlook: Short-term risks and long-term opportunities The market will continue to be volatile, and the near-term/mid-term low point may not have been reached on an index basis. The corporate buyback blackout period will continue until April 24. The best bid-ask spread depth for S&P futures dropped to $2 million yesterday, close to the historical low (historical average of $13 million). Institutional investors will begin buying gradually after the S&P 500 index falls below 5,000 points. The announced tariffs are much more severe than the market expected (the market has had sufficient cautious expectations for this event). Goldman Sachs economists estimate that the tariffs announced so far this year will increase the effective tariff rate in the U.S. by 19 percentage points (from 3% to 21%). On the positive side, the government has taken a comprehensive approach, and negotiations with trading partners may ultimately lead to lower tariff rates than those just announced. Some capitulation signals have appeared in the market, with trading volume reaching a historical high yesterday and Goldman Sachs sentiment index dropping to -2.5. According to Goldman Sachs data, when the sentiment index drops to such a low level, the average return of the S&P 500 index in the next two weeks is +1.25%, with a 70% chance of positive returns. Macroeconomic and corporate profit prospects: Adjustments have begun John Flood warned that even with positive progress in negotiations, it will be very difficult to "put the toothpaste back in the tube" after April 2. The implemented tariff measures may simultaneously impact GDP and EPS growth, and push up inflation. Wall Street has not recalibrated estimates yet, but consensus is expected to significantly lower GDP and EPS growth. Goldman Sachs currently assesses the probability of an economic recession at 35%. The forward P/E ratio of the S&P 500 is currently at 20 times, while the average forward P/E ratio during a recession is 16 times (30-year average). According to Goldman Sachs' macro earnings model, a change of 100 basis points in U.S. GDP growth will impact S&P 500 EPS growth by about 3-4%, and a 5 percentage point increase in average tariff rate will decrease EPS forecasts by 1-2%. Earnings expectations and market valuations: is the consensus too optimistic? The banking sector will kick off the earnings season next week, and the 2025 S&P 500 EPS expectations have only fallen by 2% so far this year (a cause for concern). Goldman Sachs expects S&P 500 EPS to grow by 3% in 2025 and 6% in 2026. This forecast is lower than the top-down strategist consensus (+10% and +9%) and the bottom-up analyst consensus (+9% and +14%). The consensus expects the profit margin of the S&P 500 to rise to over 12% this year, a historical high, while Goldman Sachs expects marginal profit margin expansion. The consensus expects a 6% increase in EPS year-over-year for the first quarter. S&P 50Currently, the forward P/E ratio of 20x is at the 77th percentile of a 30-year retrospective.This article is reposted from "Wall Street Vision" by author Pan Lingfei; GMTEight editor: Huang Xiaodong.