Goldman Sachs Turns Bullish on Global Stocks, Upgrades Bonds to Overweight
TREE NEWS reports: Goldman Sachs has raised its rating on global equities to overweight on a three-month horizon, aligning with its 12-month view, citing improved risk-reward entering the third-quarter earnings season after a recent valuation pullback. Simultaneously, the bank upgraded bonds to overweight on a 12-month horizon, marking a significant strategic shift in its asset allocation stance. The move reflects growing confidence in a “Goldilocks” macroeconomic scenario where growth remains healthy, recession risks are low, and inflation continues to normalize.
Market Implications
The dual upgrade signals a more constructive outlook for balanced portfolios. Goldman’s macro base case assumes inflation momentum will continue to fade through 2027, allowing central banks to adopt a more accommodative stance. This environment would favor both equities and long-duration bonds, while credit remains less attractive due to tight spreads.
Global risk assets have been consolidating since summer, with rising rates and energy prices eroding earnings tailwinds. The MSCI World Index’s 12-month forward P/E has fallen nearly 20% year-to-date, a rare de-rating in late cycle. However, Goldman’s Risk Appetite Indicator has dropped sharply to zero, with its monetary policy component hitting levels last seen in 2022—historically a precursor to improved returns for stocks and bonds as rate pressures peak.
Goldman’s US equity strategy team forecasts 18% S&P 500 earnings growth in 2027 (excluding buyback-related distortions) and expects Q3 earnings to beat expectations in both the US and Europe. If rates ease and AI adoption accelerates, equities could see multiple expansion. Regionally, Goldman remains overweight Asia and the US, underweight Europe, and recommends a barbell strategy: AI beneficiaries on one end, and rate-sensitive, high-dividend defensive stocks on the other.
On bonds, Goldman sees long-duration yields offering favorable asymmetry: potential gains from falling rates outweigh further increases. The bank expects the Fed, ECB, and BoE to have at most one more hike each, with cuts likely next year—contrasting with market pricing of more aggressive tightening. Goldman is overweight 10-year US, UK, and German government bonds, underweight Japan. Widening French OAT spreads have increased demand for US Treasuries and Bunds.
Credit is downgraded to underweight on a three-month basis, consistent with the 12-month view. Goldman prefers equities over credit, noting that credit spreads have lagged equities and remain historically tight relative to total yield. The bank favors US credit over European, high yield over leveraged loans, and is underweight Eurozone AT1s versus high yield.
Key Takeaways for Investors
- Equities: Overweight global stocks, focus on AI and defensive rate-sensitive names. Q3 earnings could be a positive catalyst.
- Bonds: Upgrade to overweight on 12-month horizon, particularly US, UK, and German duration. Bonds may shift from portfolio drag to effective hedge.
- Credit: Underweight; spreads too tight to compensate for risk. Prefer equities within risk assets.
- Risks: Further rate and energy price spikes, US midterm election uncertainty could boost volatility.
- Portfolio Strategy: 60/40 portfolios face historically low drawdown risk under Goldman’s base case. Consider tactical cash and options for protection, with VIX call spreads and front-end receiver swaptions as attractive hedges.
Goldman’s models may underestimate AI capex-driven earnings upside, similar to the late 1990s when models missed the tech rally. This suggests potential for further equity gains if AI adoption accelerates.
