Alarm bells are ringing across every corner of the market, but Goldman Sachs' derivatives team contends that the most concerning risk does not stem from the wild swings in technology stocks or the shocks from geopolitical conflicts. Instead, it is the quietly spreading cracks in the credit market.

In his latest weekend report, Goldman Sachs derivatives trader Brian Garrett noted that February "felt like a year." The market evolved from turbulence in individual stocks to volatility at the index level, culminating in the first signs of credit market "cold feet": the CDX investment-grade credit spread widened by 5 basis points in a single week, marking the largest weekly increase since last summer, while open interest in credit ETF hedge positions climbed to a record high. Garrett stated plainly, "Among all these signals, the credit 'cold feet' worries me the most."

Simultaneously, stress in the private credit market has begun spilling over into public markets. On Friday, the U.S. bank sector experienced its worst decline of the year, with the KBW Bank Index plunging as much as 6% intraday, its largest single-day drop since the trade turbulence last April.

Multiple private credit funds have encountered liquidity issues, prompting even Goldman Sachs to send letters to investors to "vouch for its innocence" in an attempt to calm market nerves.

**Panic Signals Widespread, Yet Retail Investors Remain Unfazed**

Garrett pointed out that signs of panic and contagion are "hiding in plain sight," yet retail investors seem completely unaware. He mentioned in his report hearing almost daily from competitors that "retail demand is at the 100th percentile for this time of year historically."

Specific indicators suggest the current market stress is significant. Index skew remains at multi-year highs; the spread of single-stock implied volatility relative to the index has risen to its highest level since the 2008 global financial crisis; and open interest in credit ETF hedge positions has hit a record.

Garrett noted that the cost of three-month NDX -20% put options now fully covers the cost of three-month +10% call options, meaning the Nasdaq one-month put/call skew is near its steepest level since the COVID-19 pandemic. This presents a relatively attractive structural opportunity for investors willing to bet on a rebound.

**Hedge Funds Accelerate Exodus, Tech and Cyclical Sectors Bear the Brunt**

Data from Goldman Sachs' prime brokerage shows U.S. stocks suffered a second consecutive week of net selling, with the pace of selling accelerating and involving both long and short positions. The speed of hedge funds' net selling of U.S. single stocks has reached its fastest rate since the trade turbulence last April.

Sector performance was highly divergent. The Technology, Media, and Telecom (TMT) sector saw net selling for the second week running, with particularly strong selling pressure in software and the semiconductors & semiconductor equipment arena, which intensified on Thursday following Nvidia's earnings report. All U.S. cyclical sectors—Energy, Materials, Industrials, Financials, and Real Estate—experienced net selling, reaching -1.9 standard deviations below their five-year average.

In contrast, the Healthcare sector saw net buying from hedge funds for the second consecutive week, with long buys far outstripping short sells (ratio approximately 3.5 to 1). Hedge funds are now overweight Healthcare stocks by more than 12 percentage points relative to the Russell 3000 Index, the highest level in five years. Consumer Staples was another sector with net buying for the year, highlighting its defensive characteristics.

**Credit Cracks: Spreading from Private to Public Markets**

The most critical transmission chain taking shape in this market turmoil warrants vigilance. Garrett pointed out that the fear, previously confined to long/short books, has successively permeated the index level and finally transmitted to the credit market. Historical data shows that the last time the CDX investment-grade spread traded in the mid-50s range, the S&P 500 index was about 1500 points lower than current levels.

Stress is particularly concentrated in the private credit market. As previously reported, multiple private credit funds have faced liquidity problems, with credit risk and equity risk showing a significant decoupling in recent days.

In response to market panic, Goldman Sachs sent a detailed letter to investors on Thursday, providing backing for its largest private credit fund aimed at retail investors. The letter indicated that Goldman Sachs Private Credit Corp.'s exposure to enterprise software is approximately 15.5%, on the lower end among peers; the Q4 redemption rate was 3.5%, below the industry average.

In a follow-up conference call on Friday, Vivek Bantwal, Co-Head of Global Private Credit at Goldman Sachs Asset Management, stated that through diversified funding sources, capital can be deployed consistently throughout the cycle. He also acknowledged, "If we went all-in on the retail channel, the pace of scaling would obviously be faster."

**"Heavy Assets, Low Obsolescence": Goldman Bets on a New Narrative**

Amid the severe market swings, Garrett also shared his directional judgment, expressing agreement with the "HALO" investment logic—Heavy Assets, Low Obsolescence.

He cited a market view in his report: "For the past 20 years, the investment world operated on one assumption: light assets beat heavy assets, software beat shovels, code beat copper wire, and winners could scale infinitely at near-zero marginal cost... That logic is reversing, and reversing fast."

Garrett believes that the substantial $740 billion in capital expenditures projected for 2026 must flow somewhere, and beneficiaries with solid fundamental backing will emerge.

At the ETF level, demand for the Invesco S&P 500 Equal Weight ETF (RSP) remains robust. Garrett pointed out that many portfolios currently seek equity exposure while avoiding over-concentration in the "Magnificent Seven." RSP's assets under management have grown nearly 30% over the past three months to approximately $90 billion, about twice the size of the SPDR Dow Jones Industrial Average ETF (DIA).