Goldman Sachs Derivatives Strategist: S&P 500 Has Lost Its Cross-Asset Risk Pricing Function
nashnova research
Goldman's chief derivatives strategist Brian Garrett warns that the S&P 500's correlations with nearly every other asset class have broken down — bonds, oil, and credit are screaming while the S&P hums along — a dislocation at its most extreme in fifteen years.
The S&P 500 has lost correlation with itself?
The 3-month realized correlation between the cap-weighted S&P 500 and its equal-weight version hit 0.598 on September 22 — the lowest in the 15-year series, more than 4 standard deviations below the 0.93 historical mean.
This means → knowing whether "the market" went up or down now tells you almost nothing about the average stock inside the index. The index's representativeness is collapsing.
In plain terms = the S&P 500 increasingly reflects only a handful of mega-cap names. Its relationship with most of its own constituents is nearly random.
Why are the S&P 500 and other markets telling completely different stories?
The 3-month correlation with crude oil (CL2) is -0.58, approaching the all-time low of -0.62 set in June. The 15-year average is +0.23 — a full directional reversal.
Correlation with the 10-year Treasury yield is -0.56 (all-time low: -0.64). Correlation with the investment-grade credit default swap index (CDX IG — a gauge of corporate-debt default risk) has narrowed sharply from a stable -0.77 to -0.37, close to its weakest negative reading ever. The last comparable print was during the 2020 Covid shock.
This means → the old logic chain — "S&P up → risk appetite high → oil up, credit spreads tighten" — has broken across the board.
In plain terms = the asset classes used to move like an orchestra with the S&P as conductor. Now the conductor is waving the baton and the orchestra isn't following.
Panic indicators are fighting — who is telling the truth?
Goldman's Panic Index closed below 1. The VIX is still trading in the low teens — the equity market has priced in virtually zero fear.
Meanwhile, the MOVE index (bond volatility) and credit default swaps are both registering roughly 100th-percentile peak panic. The 10-year Treasury yield has risen 41 basis points within the month and keeps climbing.
This reflects an extreme split: bonds and credit are pricing a "regime change," while equities are still trading the old script that the Fed will backstop everything.
Garrett's own framing: "The equity market is trading the Fed; the bond market is trading the regime."
What does the breadth collapse actually signal?
The 5-day average of S&P 500 constituents making 52-week highs minus lows has fallen to roughly -25 — the worst reading in 18 months — while the index itself sits near all-time highs.
Consumer staples, energy, utilities, and healthcare have seen their 63-day correlation with the S&P 500 drop to zero or below. Staples and energy have hit their most negative readings in nearly 20 years.
This means → a handful of AI and tech mega-caps are holding up the scoreboard. Beneath them, most stocks are already falling — the surface is calm, but the undertow is fierce.
Why has dispersion spiked to a historical extreme?
Bank of America data shows 12-month stock-to-stock and sector-to-sector correlations at roughly 0.1 — below the 5th percentile of the distribution since 1991.
In plain terms = nearly every stock is charting its own course, and sectors have decoupled from one another. The market no longer moves in unison — it has fragmented completely.
This reflects AI and policy uncertainty splitting the market into "winners" and "losers," driving a continuous reassessment of who belongs in which camp.
How does this dislocation ultimately resolve?
Path one: the VIX converges toward the other panic gauges → the options market reprices tail risk → equities sell off and volatility spikes.
Path two: bonds and credit calm down first → the S&P 500's current "calm" is vindicated as correct.
Either way, resolution likely requires a large enough external shock to force one side to capitulate. Until then, different parts of the market keep talking past each other, and the S&P 500's function as a risk-pricing anchor sits in a vacuum.
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