A Little Something (From Goldman Sachs) For The Weekend, Sir

As the tryptophan coma drifts away, Goldman Sachs head of hedge fund coverage, Tony Pasquariello, drops a little something for the weekend with a check-down of a dozen charts that stick out to him right now. 

They don’t carry a consistent theme nor bias, but he points out that they speak to how wildly interesting the trading environment is these days. 

1. AI Capital Concerns

For several years, US mega cap tech companies have generated, returned and reinvested capital to an extent that no other cohort could touch.  I believe that will be the case for a while longer.  what has clearly changed, however, is the capital requirement of AI -- which is now so immense that free cash flow alone can’t do all the heavy lifting.  I have three humble views here:

i. in the aggregate, it’s not yet time to worry about the inability of these companies to access capital.  to be sure, our work suggests the core hyperscalers can add around $700bn of financing before their net debt load is > 1x 2026 EBITDA:

ii. with that said, when you get under the hood of the public hyperscalers and neocloud names, it’s clear that not all balance sheets are the same:

iii. which leads to this.  as mentioned a few times recently, I suspect there will be more intra-tech dispersion in the next few years.  consider what has taken place at the edges of the Magnificent Seven ... this month alone:

2. Sector Dispersion 

A similar, but related point.  This plots the level 1 sector returns within S&P over the course of November.  to widen the aperture from the prior point on tech, I’m inclined to think the next chapter in the game will feature a higher level of realized dispersion across the stock / sector / thematic levels of the market:

3. Momentum

Where that leads: the volatility of the momentum factor.  this is the 1-month realized vol of our flagship momentum basket (there are many to choose from).  as you can see clearly, since the cycle lows of late 2022, the recent patch was in fact more volatile than the regional banking scare of 2023 or Liberation Day:

4. Mega-Cap Tech

Circling back to US mega cap tech, in the context of ChatGPT’s third birthday, it’s worth considering how much has taken place in the time since. 

Choose your superlative: NDX has more than doubled ... the Magnificent Seven has rallied over 250% ... and NVDA has ripped 945%.  this is the history of NVDA’s market cap during its time as a public company ... emphasis on the move from $1tr to $5tr since the new world was revealed:

5. Alphabest 

A related, but different point.  this simply plots the market cap of GOOG in the COVID era.  there’s no magic to this chart, but it seems the market has sniffed out a certain trail here.  the recent expansion is particularly notable in the context of how unpopular this stock has been at various turns in recent history (e.g. it was down 18% in Q1 of this year).  here I’d note that its market cap has more than doubled (to $3.9tr) since Liberation Day alone:

6. Small Caps

Outside of a few specific moments in time, I tend to be a structural skeptic on small cap (certainly relative to large cap).  with that said, as articulated by a client, note consensus expects nearly 50% EPS growth next year for the Russell 2000.  one can interpret this various ways.  As Ryan Hammond pointed out to me, the index is still recovering from two years of negative EPS growth in 2023 and 2024, and you could make an argument that some of the fiscal policies enacted will help small caps especially; the caveat is that consensus expected a similarly strong rebound for 2025 EPS growth that has not been realized, similar to the historical pattern:

7. Japanic

Things are getting wildly interesting in Japan.  the new (and seemingly popular) administration has assembled their next stimulus package.  this has been generally well received by the equity market, with a bias towards the more domestic-facing exposures (hence the outperformance of TPX over NKY).  while I don’t hide my soft spot for Japan-style trading rallies, I’d be remiss if I didn’t point out the corresponding backup in the long end of the JGB market.  here are two charts of Japanese 10-year yields ... I suppose the magnitude of the backup is a question of your perspective ... and is worth considering in the context of your sector biases:

i. this snapshot covers the full COVID era (to say it again, I wonder where the Japan reflation narrative would be in the absence of COVID ever happening):

ii. and this goes all the way back to the start of the deflation era following the late 1980s:

8. China

I’m surprised by how little attention the “China shock” story is getting in my travels (I’m headed to Europe this week, maybe that sensation changes).  I asked my colleagues for a chart that best captures what is set to take place as China floods the world with ever more and more exports.  consider this compare-and-contrast of our forward estimate of China’s current account balance (expressed as a percentage of global GDP) with the IMF.  thanks to Lexi Kanter for the chart:

9. Crypto

A final point.  I have mentioned BTC a lot this year -- almost exclusively in the context of it demonstrating store-of-value properties.  as Isabella Rosenberg pointed out to me, however, I probably shouldn’t go too far on that declaration: “I wanted to flag a chart on BTC’s correlations this year.  when you trade bitcoin, you’re trading Nasdaq (or the GS non-profitable tech basket).  fundamentally, both are a bit speculative, cyclical, and share a strong retail bias ... this also marks a slight shift from the 2020-2024 period when BTC’s strongest correlation was with 10y breakeven inflation. 

Fundamentally even though people want to call it “digital gold” -- and it can be a similar hedge in some instances -- it’s mostly not.  most of the time, you’re just trading non-profitable tech”.

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One thing struck me after assembling them: given the starting point of some scorching rallies in October ... and, for as high velocity as November was (see point #3 below) ... the fact that S&P finished this month in the green is notable.