• ‘Probability of a drawdown is rising’: Goldman’s Pasquariello
  • Risks include US fiscal deficit and narrow rally in US stocks

After a blistering rally driven by the biggest technology stocks pushing the S&P 500 to a string of all-time highs this year, it’s “a good time to tap the brakes,” according to Goldman Sachs Group Inc.’s Tony Pasquariello.

“It’s a bull market, but the probability of a drawdown is rising,” Pasquariello, the bank’s global head of hedge fund coverage, wrote in a note to clients Friday. “So I would look for places to reduce overall portfolio risk as we navigate the next phase of the political game.”

The S&P 500 closed at 5,460.48 Friday after hitting 31 record highs this year, in an artificial intelligence-fueled rally. This came as Wall Street traders boosted bullish bets on US stocks amid resilient corporate earnings and signs of cooling inflation that reinforced bets the Federal Reserve will be able to start cutting interest rates this year.

To Pasquariello, the market still gets fundamental support from easing financial conditions and US mega-cap tech stocks. “As long as the economy is growing, and earnings are growing, significant selloffs are very rare,” he wrote.

Despite this strength and momentum, he sees a few growing risks to the bullish narrative. They include a widening fiscal deficit, a build-up of stock exposure among households and institutional investors as well as the narrow breadth of the rally driven by some of the biggest stocks. “The history book tells us the risk of a selloff increases as the rally narrows,“ he warned.

Pasquariello said investors could take advantage of the low cost of downside protection and hedge portfolios with put options, as well as so-called lookback put options that allow the holder to exercise a derivative at the most beneficial price of the underlying asset, over the life of the option. In the meantime, he suggests to keep the highest quality equity exposure.

Written by:  @Bloomberg