Why remain overweight equities?

  • Goldman Sachs believes the Middle East war has worsened the global growth and inflation environment, but as inflation normalizes and real growth remains near trend, the economy could return to an environment of moderate growth and mild inflation.
  • The bank notes that nominal growth momentum may be peaking, but corporate earnings are still growing significantly faster than nominal GDP. Historically, equities have generally been able to cushion the impact of rising bond yields as long as earnings growth is strong enough.
  • There are limits to this assessment: market-based measures of inflation have begun to normalize, but macroeconomic data have yet to follow; Goldman Sachs’ equity tail-risk model also shows that signals from the business cycle and sentiment are deteriorating.

How do the three-month and twelve-month allocations differ?

  • Goldman Sachs is overweight equities and underweight credit over both horizons. Over the next three months, it is overweight cash and neutral on 10-year government bonds; over the next 12 months, it is neutral on cash and overweight 10-year government bonds.
  • Within equities, the bank favors Japan, Asia-Pacific excluding Japan, and the United States, and is relatively less favorable on Europe. Within credit, it favors dollar investment-grade and high-yield bonds and is relatively less favorable on euro credit; these arrows indicate preferences within the same asset class.
  • Although total yields on credit are high, credit spreads and term premiums are relatively low. Goldman Sachs believes lower compensation for risk makes carry trades more vulnerable to growth or interest-rate shocks.

Why does technology stock concentration make balance more important?

  • The technology sector’s weight in US equities has surpassed its level during the tech bubble, and the index weights of a handful of large stocks have also risen. However, since June 2026, the performance of AI-related stocks has been driven more by earnings than by valuations.
  • Goldman Sachs believes US equity valuations are not substantially above the fair level implied by macroeconomic conditions, assuming inflation normalizes and companies maintain their current return on equity. But AI capital spending is reducing the free cash flow of hyperscale technology companies and putting pressure on return on equity.
  • Goldman Sachs therefore proposes diversifying technology exposure with equity styles such as low volatility and high dividend yield; historically, these styles have performed relatively well during periods when the technology, telecommunications and media sectors saw significant drawdowns and underperformed the S&P 500.

How do government bonds and real assets help diversify risk?

  • Goldman Sachs’ dynamic asset allocation model shows that the risks of a stagflation shock and a decline in a 60/40 stock-bond portfolio have eased somewhat. But the correlation between stocks and bonds turned positive after the pandemic; if bond yields rise because of sticky inflation or fiscal concerns, equities could also come under pressure.
  • During the technology, telecommunications and media sector drawdowns examined in the report, the commodity index rose by an average of 23.7%, with a median gain of 6.7%; performance varied by period and cannot simply be regarded as a reliable hedge.
  • Goldman Sachs notes that over the past five years, allocations to gold or real assets significantly improved risk-adjusted performance relative to a standard 60/40 portfolio; historically, real assets also outperformed the 60/40 portfolio during periods of high and rising inflation.