Episode summary
Why US Stocks May ‘Grind Higher’
The Markets
· · Guests: Ashok Varadhan
Summary
Ashok Varadhan said he thinks U.S. stocks can keep drifting higher, even after July’s violent momentum unwind and the V-shaped rebound in tech. He argued that the combination of war-related uncertainty, Fed-hike fears, and AI leverage getting washed out has left markets with clearer signals and a higher-quality rally setup. He also said dispersion should stay elevated because AI affects hyperscalers, suppliers, and consumers very differently.
On rates, Varadhan pushed back against market pricing that implies a hike by year-end. He said he expects the Fed to stay on hold in the latter part of 2026, arguing that the inflationary forces from tariffs are fading and that AI infrastructure spending should ultimately be disinflationary once built. He described credit as constructive, but said the market should demand a bit more risk premium because supply is heavy, even if default expectations remain low given the resilience of the nominal economy.
In currencies, he said the yen’s weakness reflects Japan’s lagging normalization, and he does not believe intervention works over the longer run. His preferred broader setup was lower oil, which he thinks could fall well below $70 a barrel, supporting front-end U.S. yields and keeping the overall market in a position to participate in AI-driven productivity gains.
Key takeaways
- Varadhan expects U.S. stocks to “grind higher” because the July drawdown cleared leverage and left a cleaner rally setup.
- He thinks the Fed will stay on hold through late 2026, despite market pricing for a hike.
- He expects credit to remain constructive, but says heavy supply should require a bit more concession in spreads.
- He says yen intervention is not a lasting fix; Japan needs proper rate normalization to stabilize the currency.
- Varadhan expects oil to fall well below $70 a barrel, which he sees as supportive for front-end U.S. yields.
Notable quotes
“I think we probably grind higher. I'd say obviously July was a difficult month for markets”
“I think we're going to still see high levels of dispersion. I don't know if it's going to be as extreme as what we saw”
“I don't think we will see hikes in the latter part of this year. I think rates are going to stay on hold”
“I think I'm fairly constructive on credit. That being said, we're seeing a lot of supply”
“I don't really believe in intervention. I don't think it works over the longer run”
How the episode opens
This is The Markets. I'm Mike Washington. Today is Wednesday, August 5th, and I'm on the Goldman Sachs Equities trading floor, joined by Ashok Varadhan.
Ashok is the co-head of Global Banking and Markets at Goldman Sachs. Ashok, it's great to have you. Yeah, it's good to be here again.
I got to tell you, there's a ton going on right now. I feel like there's a bunch of different ways that we could take this conversation, but I want to start on AI and momentum. You were on this podcast back in Q4 of 2025.
You said that stocks are going higher and AI specifically was going higher. We just had one of the most violent momentum drawdowns in history last week to a V-shaped recovery in tech, and S&P sits at all-time highs. Do you feel like this is the setup that markets could continue to grind higher on the go forward, or is there a wall of worry that we still have to get over?
I think we probably grind higher. I'd say obviously July was a difficult month for markets across a bunch of variety of different things. I'd say first, obviously, the war re-escalated, and that obviously created some, some trepidation in the market.
There was obviously nervousness that the Fed could potentially hike rates, and that created an item on the wall of worry. And then, of course that kind of related to and kind of somewhat unrelated to, like you said, the violent tech momentum unwind that we saw. And I think sort of all of those things, not just the tech momentum unwind, but I think all of those things kind of hit something like a recovery towards the latter part of July.
And so it feels like signals are a little bit clear ahead.
From the episode’s captions: roughly the first two minutes, lightly cleaned. Keep watching on YouTube →
Topics
- us stocks outlook
- credit markets
- ai-led stocks
- oil prices
- fed rate outlook
Companies and tickers mentioned
- GS
- Goldman Sachs
Watch the episode
Watch “Why US Stocks May ‘Grind Higher’” on YouTube
Summary, takeaways and quote selection by Octagon. Quotes are short excerpts; the full conversation is in the episode.
More from The Markets
The Markets, this episode and its artwork belong to Goldman Sachs. Octagon is not affiliated with the show; this page is an independent summary.
