Big Tech Opportunity

How Investors Reacted to the Ceasefire Deal This is the Markets. I'm Mike Washington. Today is April 8th and I'm on the Goldman Sachs equities trading floor joined by my colleague Lee Coppersmith. Lee Co runs New York equity, derivative sales and Global banking and markets. Lee, thanks for joining me. Speaker 2 Thanks, Mike. Appreciate it. Speaker 1 So ceasefire, these headlines that we got overnight of a two week ceasefire clients have been not necessarily positioned for this type of headline. This is why you're seeing the gap higher over these last few weeks on the macro side, you've seen, you know, fairly aggressive shorting in the macro community to protect downside. How? What do you make of the backdrop that we found ourselves into ahead of the headlines last night? Speaker 2 Yeah. So what I would say is that it's been a very challenging environment for the institutional community that we mostly talk to, right. And so what's defined, call it the last month or so has been an environment where clients have felt like they need to de risk and that's really been led by a lot of shorting in macro products. And you know what does that mean? That means in equity futures, in ETFs and we've seen it also in our options space where people can buying a lot more volatility through index option puts. Speaker 1 Yeah. I mean that all makes sense. And then so Fast forward now we see today's price action up, you know, 2 1/2 three percent. Is there still a wall of worry that we need to climb? Are we getting towards the end of these Middle East tensions or are investors still truly worried about the forward and needing to hold on to these tail risk hedges to the downside? Speaker 2 I think there is a wall of worry now. We have seen a pretty large reset in the geopolitical volatility risk premium that was once associated with the market when we were trading 5% lower. But what I would tell you is that the level of positioning today is still much more friendly and conducive for the market continuing to rally versus where we were, call it, around quarter end. And so I do think for clients, there hasn't even been enough time to fully digest the ramifications of what the ceasefire might mean. And so given the backdrop of where they now are, I think the right tail has actually intensified from them because they feel like they have actually taken down exposures to a level where they'll miss out if the market were to continue rallying. Unpacking Single Stock Volatility and Tech Opportunities Yeah. Speaker 1 Almost a formal trick. Yeah, I think one thing that stood out this year too, and you've pointed this out a ton, has been the resiliency at the index level, but it's not telling the story about what's actually happening under the hood. Some of the single stock volatility has been substantial. How would you characterize that? What's standing out? Like why is that happening? Speaker 2 Yeah. So for most of this year already, the biggest buzzword has been dispersion, right? And So what does that kind of meant? The playbook that's really worked really well through most of this year has been one of long single stock options and against it short index volatility. And so why are people doing that, right. People have been doing that mainly because they want to express their core thematic views in the single stock world where they can get the idiosyncratic exposure while trying to obviously neutralize any kind of broader market impact. And for a lot of this year, that was a great playbook. But what happened obviously when you kind of introduced the macro concerns that we saw now in the last month, it interrupted a lot of what people really, really comfortable expressing. And So what happened was you saw a big spike in index volatility, which eradicated a lot of the performance in that dispersion strategy or that environment as a whole, and in turn also helped force a lot of the unwinds we then saw both at the thematic level, but also in the options market because people really couldn't feel comfortable holding the same levels of exposure they once had in the volatility space. Speaker 1 Yeah, there's like so many technical dynamics that are at play in the market as a result of those points that you just made. And one other thing that stood out to me was that mega cap tech single stock fall versus the rest of S&P single stock fall has been completely blown out where you're actually it's, it's cheap to put to, to buy Vol in mega cap tech first single stock. Is that posed as an opportunity in your eyes? Is, is, is tech outright like just from a delta perspective going to be an out performer in mega cap tech? Like what do you make of that? Speaker 2 Yeah. So the observation I would make is you haven't seen this at any other time outside of March 2020 during COVID, right. And so during that, just like today, what a kind of really revealed was that the market had lost its confidence in those Max 7 stocks as being the leaders. And so I would tell you that I think if you were to, you know, see what happened back then, obviously post COVID, obviously the re emergence of those companies took place. And it was a really great opportunity to be putting on those upside expressions, particularly in those companies, whether you did them outright or if you did them versus the rest of the market, right. And So what we would say today to clients is that if you wanted to basically look at ways to raise your exposure to the broader market as a whole after a month of basically de risking, this presents another really attractive opportunity for clients to use those expressions as a way to get longer on the market as a whole. Identifying Secular Winners and AI Investment Opportunities Yeah. Speaker 1 So packages that we've had, you know, multiple weeks of net selling across our prime books, there's been a ton of dislocations. We're now gap been higher on the back of these headlines. What pockets of the market through all this are now standing out to you as attractive? Speaker 2 Yeah. So what I would characterize the last month have been is really one where people took down allow their cyclical exposure, right? Because that's obviously what was most at risk from the macroeconomic shocks we just witnessed. But what people tried to hold on to as much as they could was their secular winners, right? The ones that obviously have those single stock stories that are more associated with longer term positive fundamentals. And So what I would tell you is that the first step in this equation, what clients are looking to do is first take down some of the short exposure you earlier mentioned. And that way they can get longer the market, but then #2 is they want to look at ways to kind of get back into the full level of length they once had in some of those core secular winners, right? And So what does that mean? I would say people have not lost much confidence in the AI theme. It's obviously evolved from where it was since the debut of ChatGPT. But I would say we're now at a place and time where people want to own it on a barbell level, right? So they want to own both the inputs in the AI through the infrastructure place, but they also want to own the outputs in the AI, which means the, you know, the the transport companies, the infrastructure that actually then leads to obviously productivity booms. And So what I would tell you is that people want to own the inputs and they want to own the outputs. Yeah. Speaker 1 Awesome. And So what are you going to be looking at in the weeks ahead? Earnings are right around the corner. Speaker 2 So, yeah, so earnings is obviously the the marquee catalyst, I would say that kicks off next week that we can tangibly look to, right. And so far this year, earnings ambitions have been incredibly resilient despite what's going on in the last call it month or so. And So what we're really going to look to see from corporates is to see that confidence level is sustained. We think it will be right. We think obviously given this kind of going into the back burner on the conflict side that you can refocus on the the real drivers behind what is always kind of been the case in the last few years, which is the resiliency of corporate America. And So what we're looking for is obviously another low bar given where positioning now sits and hopefully enough confidence that comes through from these these companies really kind of continuing to commit to, you know, the same trends we've been seeing honestly the last few years. Speaker 1 So given some of these dislocations that we've seen over these last few weeks, like is MAG 7 actually a buy here and you see an opportunity? Speaker 2 I think it is, I think both locally here and over the medium term, the level of valuations, the light positioning and the the fundamentals that have always kind of been associated with these companies all remain incredibly friendly. And so to put to put it all in A1 wrap, I think honestly clients should be looking at expressing a lot of this upside through the call options market and. Speaker 1 Which is cheap as you mentioned. Speaker 2 Which is we set a lot lower into what should be a pretty catalyst rich season for these companies. Thank You for Listening and Important Disclosures Lee, a lot going on. Always appreciate your insights. Thanks for being here. Thanks, Mike. And that does it for this week's episode of the Markets. I'm Mike Washington. Thanks for listening. 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