Episode summary
Hedge Funds Are Cautious on Stocks amid Rates and Energy Volatility
The Markets
· · Guests: Mark Wilson
Summary
Mark Wilson says the dominant forces in European markets are higher rates, higher oil prices, and the resulting inflation shock, with Europe more exposed to energy than to rates alone. He points to a sharp negative correlation between Euro stocks and 10-year Bund yields, plus widening OAT-Bund spreads tied to French budget politics, as signs that the region is in a regime shift rather than a normal cyclical move.
He argues that investors have already cut risk meaningfully: fundamental hedge funds have reduced net equity exposure, and rate-sensitive parts of the market such as European renewables have de-rated sharply. Even so, he says Europe is not simply a value trap. The region is cheaper than the US, has less tech, but also has investable themes in industrials, defense, renewables, and energy independence, with AI potentially helping offset Europe’s demographic challenges.
On earnings, Wilson thinks the US is near peak third-quarter growth, while Europe is still posting strong numbers, including 22% year-on-year earnings growth for the second half of this year and 15% growth excluding energy. His preferred trades are US mega-cap tech, where he expects real AI adoption and returns on heavy capital spending to show through, and German fiscal spend beneficiaries, which he says still look inexpensive despite strong estimate revisions.
Key takeaways
- Mark Wilson says Europe is more vulnerable to the energy shock than the rate shock, and that OAT-Bund spread pressure is now a key France-specific risk.
- He says hedge fund positioning in equities has been cut sharply, with US fundamental long-short clients and global long-short exposure both near low end ranges.
- Wilson argues Europe is cheaper than the US but not a value trap, citing investable themes in industrials, renewables, defense, and energy independence.
- He expects US third-quarter earnings growth to be near peak levels, while Europe can still deliver 22% growth in the second half of 2026.
- His favored trades are long US mega-cap tech and long German fiscal spend beneficiaries, both of which he says offer growth at reasonable valuations.
Notable quotes
“In Europe, we are more vulnerable to the energy shock, and so the inflationary pressure is higher”
“You haven't seen that degree of negative correlation since back to the 1990s, so this is really a bit of a regime shift”
“So positioning has been really cut in response to rates and a bunch of other uncertainties that are out there”
“I think there's increasing hope that actually the European market offers real opportunity, and as the strategy to respond to these challenges becomes more evident”
“I absolutely want to be long US mega cap tech”
How the episode opens
This is The Markets. I'm Chris Hussey, and today is Wednesday, October 7th, and I'm here in the Goldman Sachs trading floor with Mark Wilson, who is head of European Equities, Franchise Sales and Hedge Fund Coverage within our FICC and Equities Group. Mark, thanks so much for joining us.
Thanks for having me, Chris. Okay, Mark always great to have you here. Let's kick it off with the two headwinds in the market today.
Rates have been going higher, oil's been going higher. Europe, of course, is exposed to both. What is Europe exposed to most, and what are clients caring about most here?
In Europe, we are more vulnerable to the energy shock, and so the inflationary pressure is higher. If you think about the feed through to the markets, on six-month correlations, Euro stocks and 10-year Bund yields are about negative 70% correlated right now. You haven't seen that degree of negative correlation since back to the 1990s, so this is really a bit of a regime shift.
You're right to ask the question though, because obviously over the last couple of weeks we've had a much more idiosyncratic event in Europe. OAT spreads versus Bunds have blown out, and some of the social, but mainly political issues focused around the upcoming budget in France have been a real problem. And so that's a major European specific issue, which is now there, and I think will be an ongoing feature over the next few months as we get towards the presidential elections in France in the first half of next year.
Ultimately, here and now, the two things which clients are most focused on are the price behavior of that OAT-Bund spread, and also the energy and gas inventory stock situation as we head in towards winter.
From the episode’s captions: roughly the first two minutes, lightly cleaned. Keep watching on YouTube →
Topics
- hedge fund positioning
- interest rates volatility
- oil price volatility
- french government borrowing
- mega-cap technology outlook
Companies and tickers mentioned
- GS
- Goldman Sachs
Watch the episode
Watch “Hedge Funds Are Cautious on Stocks amid Rates and Energy Volatility” on YouTube
Summary, takeaways and quote selection by Octagon. Quotes are short excerpts; the full conversation is in the episode.
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