Insights 
VT 
Following the recent US-China agreement, Goldman Sachs has adjusted its forecast for a US recession over the next 12 months to 35%, down from 45%. This change also affects their prediction regarding the Federal Reserve, now anticipating just one rate cut this year instead of three.
Additionally, the firm has revised its year-end target for the S&P 500, raising it to 6,100 from an earlier estimate of 5,900.
Economic Momentum And Financial Conditions
The downward revision in recession probability to 35% reflects a growing confidence in the economic momentum, likely supported by firmer diplomatic ties and the easing of global tensions. These improved trade and policy signals appear to be fostering better financial conditions, which in turn shape expectations for monetary policy. That said, the reassessment of rate cuts — now expected to be just a single move by the Federal Reserve rather than three — points to somewhat stronger underlying demand, potentially sustaining inflationary pressures above the central bank’s comfort zone.
By lifting their year-end S&P 500 target to 6,100, the firm signals a stronger earnings outlook, underpinned by wider margins and corporate resilience. This should not be misread as unqualified optimism, though — it suggests a measured view that the broader index can rise on the back of stable macro assumptions and fewer rate-related headwinds. For us, that recalibration forces a rethink in the short-term cost of capital and forward equity multiples.
Now, in practical terms, shorter-dated options premiums may not unwind as quickly as one might expect. Forward volatility implies that risk pricing has not entirely aligned with these fresher projections. Short gamma positions, for example, could become more sensitive to even mild earnings surprises or shifts in Treasury yields. Maintaining delta neutrality will require more active adjustment, particularly near upcoming rate decisions and inflation prints.
Blanket bias toward rate-sensitive sectors needs a rethink. The reduction in anticipated cuts implies that credit spreads may tighten, but duration trades are not about to get a free pass. In fact, for those of us focused on skew and tail protection, this one-cut view expands the likelihood of policy staying restrictive longer — and those knock-on effects for growth markers like payrolls and core inflation are far from settled.
Risk Premia And Derivatives Pricing
We’ve also noticed that the steepening of the front end is not being priced in in a balanced way across instruments. That asymmetry opens up some tactical relative value which, if sized properly, can absorb the shocks from a stickier disinflation process. This isn’t the time to strip risks down to a simple bear or bull case — it’s about recognising where risk-premia has misaligned with fundamentals.
Derivatives pricing, particularly on the index level, suggests traders have not completely internalised the implications of just one rate cut. Some compression in implied volatility has occurred, but not to the degree that would suggest a stable rate environment. There’s still an embedded premium for policy error or geopolitical re-ignition, which markets are not ready to let go of.
So while the sentiment shift suggests a more constructive environment for risk assets, we are approaching this from a place of caution rather than euphoria. Risk positioning should be built around the revised forward curve. In these coming weeks, we’re focusing on convexity rather than direction, and that means being more selective — not just in which instruments are employed, but when positions are initiated.
