Goldman Sachs Says the ‘Goldilocks’ Scenario Is Arriving Ahead of Schedule
TREE NEWS reports: Goldman Sachs partner Mark Wilson argues that global equities face increasingly clear upside into year-end, and that investors need not wait for the US midterm elections to re-engage with risk assets. The market, he contends, has already fully priced stagflation risk, while a milder ‘Goldilocks’ economic scenario — growth that is neither too hot nor too cold — is beginning to take shape.
Recent price action appears to validate that optimism. AI-driven fear of missing out has returned to markets. After Meta unveiled its Muse product, expectations for how quickly large-scale AI reaches consumers accelerated sharply, pushing AI-themed assets such as the Nasdaq to a strong upside breakout on Monday following three months of consolidation and position trimming after a historic second-quarter surge.
Bond Yields Are Rising for the Right Reasons
US Treasury yields have climbed again, but the driver has changed. Unlike earlier episodes sparked by competition for capital from government borrowing and AI capex, or by energy-driven inflation, this leg up is supported by stronger-than-expected purchasing managers’ index data. That signals persistently robust nominal US economic growth — and equities have withstood the move in yields and held their gains.
The prevailing worry is that a seven-month streak of rising 10-year Treasury yields — the longest in fifty years — will eventually drag stocks lower. Many investors would rather wait for Gulf tensions to cool and the midterms to pass safely before adding risk exposure. Goldman’s analysis pushes back on that consensus, pointing to substantive improvement in inflation, growth, and corporate earnings as the foundation for a year-end equity rally.
Disinflation: From Energy to AI
For months, the Iran conflict pushed energy prices higher and masked an underlying cooling in core inflation. Goldman notes that tariff pass-through effects are fading, and that rate hikes and the resulting tighter financial conditions have done their work. If logistics flows through the Strait of Hormuz normalize, energy prices face meaningful downside risk — particularly since Iran’s maximum negotiating leverage window is expected to close around November 2, opening the door to a new disinflationary energy narrative at any moment.
More importantly, Meta’s Muse product has fired the first shot of disinflation in consumer goods and services. Goldman’s research on the ‘agentic AI era’ suggests technological progress is materially lowering consumer-side costs, a disinflationary force that will matter more than falling energy prices.
Slowing Growth Limits Central Bank Hawkishness
Despite geopolitical and energy uncertainty over the past six months, US economic activity has proven more resilient than expected. Yet Goldman economist Jan Hatzius finds that this upside risk is fading and the second derivative of growth is set to slow. As fiscal tailwinds such as tax cuts fade, higher gasoline prices and mortgage rates will weigh on parts of the economy and on consumers. AI capex cycles will continue but decelerate.
Combined with expected disinflation, central banks are likely to raise rates by less than the market currently prices. Wilson stresses that now is not the time to fear higher yields — that concern was justified seven months ago.
Core Earnings Stay Strong, Underpinning Valuations
Amid fierce debate over earnings sustainability and an ‘earnings bubble,’ Goldman’s US strategy head Ben Snider sees ‘excess earnings’ at some companies but no broad bubble. He flags three facts for investors:
- Do not pay a large premium for record ‘other income.’
- Memory chips and some semiconductor stocks are genuinely in excess-earnings territory.
- Through at least end-2027, core earnings are highly likely to remain particularly strong even as growth decelerates, providing fundamental support for equity valuations.
The Stagflation Narrative Fails, Goldilocks Resets the Board
Markets had been trying to price a sharp slowdown in growth and earnings alongside higher rates, but the macro data do not support that perfect stagflation story. Instead, slower growth, a diminished inflation threat, a softening central bank stance, and a year of valuation de-rating combine into a favorable setup. Goldman likens the moment to the bull-bear battles during the major technological transformation of the mid-to-late 1990s.
If a Goldilocks scenario ultimately arrives, the historical pattern of a year-end rally after midterm elections still applies. Wilson concludes that investors should not wait for the midterms to act, and that with energy price threats receding, European and UK equities are also well positioned to join the advance.
Key Takeaways for Investors
- Stagflation risk appears fully priced; the marginal surprise is now toward milder growth and disinflation.
- Rising yields are being driven by strong growth data rather than inflation or fiscal crowding-out — a more benign signal for equities.
- AI adoption, exemplified by Meta’s Muse, is emerging as a structural disinflationary force alongside normalizing energy prices.
- Core earnings, not headline ‘other income,’ should anchor valuation work; excess earnings in memory and some semis deserve scrutiny.
- Positioning ahead of the midterms, rather than after, may capture the historically seasonal year-end rally in US, European, and UK equities.
