Goldman Sachs Hedge Fund Chief: "Zero-Day Options" Suppress U.S. Stock Volatility, Technology and Energy Remain the Best Choices

The US stock market is currently caught in a tug-of-war between bulls and bears, while a latent force from the options market is confining the S&P 500 Index’s intraday fluctuations to an unusually narrow range.

Tony Pasquariello, Head of Hedge Fund Coverage at Goldman Sachs, warned in his latest macro market report that "trading is not easy right now." He noted that the stock market is being suppressed by rising oil prices and higher interest rates on one hand, but is supported by corporate earnings growth on the other, leading to an overall stalemate. Meanwhile, Goldman Sachs economist David Mericle has factored a 25 basis point rate hike at the Federal Reserve's September FOMC meeting into his forecast, even though he himself does not see the current economic situation as providing strong grounds for a hike.

On the market structure front, Goldman Sachs derivatives strategist Brian Garrett pointed out that volatility harvesting strategies represented by "zero days to expiry options" (0-DTE) have become massive in scale. In the absence of intraday catalysts, these strategies forcibly compress market volatility into an increasingly narrow range. Despite the high degree of macro uncertainty, Pasquariello maintains a dual overweight position on energy and technology sectors, and views US fiscal sustainability as the biggest long-term risk for US equities.

Zero-Day Options Create "27-Day Straitjacket"

What surprised Pasquariello is that over the past 27 trading days, the S&P 500 Index’s intraday trading range has consistently remained below 1%—the longest period of low volatility since the outbreak of the COVID-19 pandemic.

Brian Garrett offered a structural explanation: "This reflects the current market structure. With lower trading volumes and a lack of significant news, the options market plays a more important role in intraday trading. The 'yield' strategies in the 0-DTE options market are massive in scale, operating from the 9:30 AM market open. In the absence of catalysts, these strategies force the market into a narrower volatility band."

Pasquariello summarized this phenomenon as follows: zero-day options can, to some extent, 'shackle' intraday volatility, but this suppression is not indefinite. Once a major catalyst emerges, the pent-up volatility will be unleashed all at once.

Fed Rate Hike Expectations Rise, but Economic Fundamentals in Question

At the macro level, Goldman Sachs Chief US Economist David Mericle has incorporated a 25 basis point rate hike at the Fed's September meeting into his base case scenario, but he also made it clear that the rationale for such a hike is not strong from an economic perspective.

Mericle believes that the portion of inflation above the 2% target can be attributed to one-off factors, whose effects are expected to fade gradually. The core PCE inflation rate has dropped to around 2.5% over the past three months, which he sees as an early signal. He also notes that the apparent breadth of inflation is mainly due to tariff effects rather than economic overheating, and inflation expectations currently do not face an urgent risk of becoming unanchored.

Ben Snider, Head of Goldman Sachs US Portfolio Strategy, reviewed US equity historical performance across the last seven rate hike cycles: in the first three months after the start of a rate hike cycle, the S&P 500 averaged a 2% decline, but rebounded an average of 9% over the following 12 months. The only significant exception was the sharp adjustment in 2022. Snider’s research also shows that energy and technology were the two top-performing sectors in the early stages of previous rate hike cycles.

Technology & Energy: Goldman’s Core Pairing Not to Be Relinquished

In his report, Pasquariello emphasized that 2026 is an exceptionally unique year, where every week feels like a standalone adventure and momentum factors have experienced dramatic swings. But through it all, the combination of long energy (up 44% YTD) and long technology (up 23% YTD) has continued to deliver.

Regarding tech prospects, another Goldman Sachs analyst, Rich Privorotsky, cited industry leaders as saying: "Those at the cutting edge of technology will tell you that the pace of technological advancement is so stunningly fast that they need to deliberately slow down. That in itself is the strongest endorsement of the technology. Safety and alignment issues are indeed real, and it’s vital to solve them—the warning 'this stuff really works' is embedded in their caution."

Pasquariello stated that, given current macro dynamics, he is not inclined to give up on the energy plus technology pairing, nor on the combination of global rates long and equity long strategies.

Defensive Positioning, Market Sentiment Drops to Year’s Low

Looking at position data, Goldman Sachs’ prime brokerage book shows that current net exposures are at the 26th percentile of the past year, with last week’s net selling in macro products marking the largest weekly drop since “Liberation Day.”

Goldman Sachs’ US portfolio strategy sentiment indicator currently reads -0.5 standard deviations, the lowest since March this year and at the 26th percentile over the past decade.

Pasquariello said he understands why active managers are reducing risk during a historically weak seasonal period and recognizes that systematic funds could be forced to cut further on price declines. However, he still expects the market to complete necessary adjustments in September and October, laying a solid technical foundation for the final two months of the year.

Fiscal Sustainability Is the Biggest Long-Term Risk for US Equities

In his report, Pasquariello lists US fiscal sustainability as the biggest long-term risk for US equities, bluntly stating that this problem could eventually lead to much higher taxes or persistently high interest rates, both of which are unfavorable for equity investors.

He also noted that despite seasonal headwinds, the Bloomberg Commodity Index (BCOM) has recently broken through its 2022 highs—a signal worth watching.

In Pasquariello’s view, the current market is a 'poised, underweight stance, headed into a catalyst week that the market has spent a month avoiding pricing in.' Zero-day options can temporarily suppress intraday volatility, but that suppression has its limits.