Written by: Rita
The cyclical rotation in the summer asset market continues, but momentum is slowing.
On September 2, Goldman Sachs released its Global Opportunity Asset Locator report, maintaining its core stance of overweighting equities and underweighting credit over the next 12 months, while adopting a neutral tactical view on equities. Global equity markets have traded in a range since June, with sellers targeting beneficiaries of AI capital expenditures, while market breadth has improved significantly. The equal-weighted S&P 500 outperformed the Nasdaq by 16% in June and July. Goldman Sachs believes that sustained earnings growth should support equities outperforming bonds and credit over the next 12 months, but returns may slow as earnings growth and earnings revisions peak. In the short term, interest rate volatility, seasonal weakness, the U.S. midterm elections, and geopolitical risks could elevate volatility.
Profit growth supports medium-term stock performance, but the rate of return will slow.
Goldman Sachs' optimistic outlook on equities is grounded in earnings. Global equity holdings' returns (starting dividend yield plus expected earnings growth over the next 12 months) have risen significantly this year, with all regions posting double-digit earnings growth and positive revisions.
The peak of earnings growth and earnings revisions has likely passed. Since June, global equities have traded in a range, with significant portfolio reversals among AI capital expenditure beneficiaries, while sectors outside AI have outperformed. The equal-weighted S&P 500 outperformed the Nasdaq by 16% in June and July, a clear signal of improving market breadth. Goldman Sachs expects earnings growth to remain in double digits through 2027, but at a lower rate than current levels, leading to a narrowing of equities’ excess returns relative to bonds.
In terms of valuation, earnings growth has driven valuations lower, with the MSCI World Index’s 12-month forward P/E ratio declining significantly this year. Goldman Sachs’ equity tail risk framework shows that the probability of a large equity drawdown has returned to normal levels, but the potential for another strong rebound is also limited. This is a typical characteristic of the late stage of the economic cycle, where high valuations constrain upside potential, and the structural tailwinds from AI may not be fully captured by the framework.
Goldman Sachs maintains an overweight position on Asia and the U.S., and an underweight position on Europe, believing Asia has the greatest upside potential, while Europe faces dual headwinds from TTF natural gas prices and political risks.
Long-term interest rates have become a speed limiter for the stock market.
Long-term bond yields are approaching or even surpassing the highs seen after the global financial crisis. This is supported by three factors: a strong cyclical backdrop, capital competition driven by AI investments, and concerns about fiscal sustainability.
Goldman Sachs noted that accelerated nominal growth is a key factor driving higher bond yields, while also supporting earnings growth, enabling equities to better absorb rising yields despite shrinking valuations. If yields rise too rapidly—due to surging energy prices, a more hawkish Federal Reserve, or rising term premiums—it could trigger significant market dislocation. Data shows that a 10-year U.S. Treasury yield increase exceeding two standard deviations over three months typically exerts substantial downward pressure on equities.
A more fundamental change is that the role of bonds as a risk-mitigation tool is deteriorating. Goldman Sachs believes the current environment resembles the pre-1990s model, where bonds served more as a source of income than as a hedging instrument. Even if inflation normalizes by year-end and the negative correlation between stocks and bonds returns, the hedging effectiveness of bonds may be weaker than over the past 30 years. The protective layer of the traditional 60/40 portfolio is thinning.
The growing dominance of AI technology stocks increases portfolio risk; style diversification becomes crucial.
Over the past three years, AI-driven tech stocks have elevated their weight and allocation to levels comparable to the tech bubbles of the 1920s, 1950s, and late 1990s. Although market breadth improved over the summer, tech stocks remain the primary contributor to global equity returns this year. This concentration is equally evident in Asia, where semiconductor companies have dominated regional returns.
Unlike U.S. mega-corporations with strong balance sheets and ample cash flow, global semiconductor companies operate in a highly correlated and cyclical industry. Should the AI theme reverse, the risk of coordinated declines across related sectors increases significantly.
With the protective role of bonds weakening, diversification within equities has become more important. The correlation between the S&P 500 and low-volatility, high-dividend stocks has declined significantly, resembling patterns seen during the tech bubble. Goldman Sachs recommends a barbell strategy, allocating to global AI-related stocks on one end and high-dividend, low-volatility defensive sectors on the other. Regional diversification has also played a role, with non-U.S. stocks generally outperforming the S&P 500 since 2024, led this year by North Asian markets benefiting from accelerated AI capital expenditures.
The allocation value of gold and physical assets is becoming increasingly evident.
The U.S. Treasury’s intervention in foreign exchange and bond markets triggered a strong rebound in gold, as well as dollar-hedging instruments such as Bitcoin and the Swiss franc. Goldman Sachs’ commodities team maintains its forecast of a $4,900 per ounce fair value for gold by end-2026, based on sustained central bank gold purchasing and private ETF capital inflows amid a hold-and-wait stance by the Federal Reserve.
The correlation between gold and global investment benchmarks has declined significantly, providing further evidence of the diversification value of real assets. Goldman Sachs notes that over the past five years, replacing the bond portion of a 60/40 portfolio with gold or a broader basket of real assets has significantly improved risk-adjusted returns.
Goldman Sachs maintains a neutral stance on commodities overall. Despite recent escalations in the Strait of Hormuz, the team expects Brent crude to fall to $80 per barrel by year-end. Actual oil exports from the Persian Gulf have increased by 40% since the March low, with rising volumes through gray channels and price-sensitive net crude imports from China suggesting limited upside for oil prices, even if Middle East disruptions persist. Gold’s rally, meanwhile, may become more volatile, as heightened demand for call options has amplified volatility on both the upside and downside.
Goldman Sachs maintains an underweight position on credit. Credit spreads remain tight, with debt issuance related to AI capital expenditures exerting dual pressure on credit: pushing up government bond yields and widening credit spreads, particularly for AI-related issuers compared to their non-AI peers. Historical patterns suggest that during the restructuring and deleveraging phases of the late cycle, equities typically outperform credit. Goldman Sachs expects credit spreads to widen modestly by year-end.
Goldman Sachs' core allocation framework is: maintain investments, buy on dips, and manage risk through diversification and selective hedging tools.
Disclaimer
This article is a compilation and interpretation by Chaoxiang Research of a third-party brokerage research report (Goldman Sachs, September 2, 2026), combined with publicly available market information. The ratings, price targets, earnings forecasts, and related judgments cited herein reflect the views of the brokerage’s analysts and represent the position of their respective institution only; they do not reflect the views of Chaoxiang Research nor constitute any investment advice.
The market carries risks; make decisions independently. This article should not be used as a basis for buying or selling any securities.