Tony Pasquariello, Goldman Sachs partner and global head of the firm’s hedge fund coverage, observes signs of bull "capitulation" in US equities as markets enter a new phase of skepticism toward the AI cycle. Investors are questioning the sustainability of capital expenditures and future returns from hyperscale cloud providers.
Despite this, Pasquariello maintains that the primary uptrend remains intact, expecting the S&P 500 to finish 2025 above current levels, though he has tempered near-term performance expectations.
On Thursday, US stocks plunged sharply, with the S&P 500 initially rallying over 1.9% intraday before closing nearly 1.6% lower—erasing over $2 trillion in market cap and closing below its 100-day moving average for the first time in months. Nvidia’s strong earnings failed to ease valuation concerns, with the S&P 500 down ~4% in November, on track for its worst November since 2008.
In a Friday client note, Pasquariello noted that lower prices could trigger further systematic and active selling, and October’s "post-party hangover" may linger. However, he believes this week saw significant risk-off moves and early capitulation signals.
New York Fed President John Williams (a permanent FOMC voter) struck a dovish tone Friday, stating the Fed has room to cut rates further as the labor market cools. This boosted December rate-cut bets, with odds jumping from ~30% to 56% for a 25bps reduction.
BMO’s US rates strategist Vail Hartman highlighted Williams’ importance as a centrist FOMC voter, whose stance could sway December’s decision.
**Bull Capitulation Emerges, Selling Pressure Persists** Goldman’s trading desk has observed gradual selling for weeks, but Thursday’s selloff was abrupt as investors locked in year-end gains. Pasquariello cited client discussions and market action, noting the S&P 500’s ~11% YTD gain masks significant risk rotation.
He added that despite Nvidia’s "impressive beat-and-raise," the AI cycle is entering a phase where investors doubt hyperscalers’ capex sustainability. Goldman trader Rich Privorotsky recently noted the AI narrative has shifted toward Google’s Gemini-3 model, disrupting the ecosystem and heightening ROI uncertainty.
**Fed Hawkishness Fuels Policy Uncertainty** Pasquariello flagged mixed jobs data—three-month average job growth is "decent," but September’s 4.44% unemployment rate is "concerning." Recent hawkish Fed remarks have revived policy uncertainty, with some officials resisting December cuts, marking a shift from prior easing expectations.
Privorotsky emphasized contradictory signals: steady job growth vs. rising unemployment (driven by youth labor influx). August’s downward revisions were particularly weak, with Goldman’s internal tracker showing just 39K potential job additions.
**Williams’ Dovish Remarks Lift Sentiment** Williams stated the Fed could ease further as labor markets cool, moving policy closer to neutral. He noted reduced inflation upside risks and rising employment downside risks. Markets reacted positively: Fed funds futures priced 56% odds of a December cut (up from 30%), equities and bonds rallied, and gold rose $10.
His comments stood out post-October’s rate cut, as other officials opposed or hesitated on a third consecutive cut. Williams attributed ~0.5–0.75pp of inflation to tariffs but saw no secondary effects, expecting 2027 inflation at 2%.
**Systemic Factors Amplify Volatility** Privorotsky attributed the selloff to four factors: Fed hawkishness, AI sector divergence, crypto flash crashes spooking retail investors, and quant fund liquidations—transitioning from "technical turbulence" to "structural decline."
Crypto volatility became a retail sentiment gauge. Unlike past "buy-the-dip" behavior, large accounts liquidated positions, spreading panic to unprofitable tech/AI stocks.
Trend-following funds held $500B+ long positions since August. Key technical breaks triggered systematic selling, while vol-control strategies exacerbated the drop as realized volatility spiked.
**Bullish Stance Intact, but Expectations Lowered** Pasquariello remains constructive, expecting economic acceleration and improved liquidity. While systematic selling needs absorption, he anticipates corporate buybacks and retail inflows.
"This is a bull market; the primary uptrend is intact," he wrote, maintaining a 2025 S&P 500 target above current levels but trimming near-term forecasts.
Technicals suggest S&P 500 futures may test 6500, but Privorotsky argues AI’s value proposition remains intact. Long-term winners will be labor-intensive firms automating for margin expansion. Market stabilization requires: trend-following fund de-risking, retail long unwinds, and crypto stability/Fed dovishness/AI capex support.