Goldman Sachs: Goldman Sachs macro weekly: Major central banks may still raise rates after pauses as AI earnings and election risks coexist

How might US and European central banks raise rates after pausing?

The Federal Reserve held rates steady at this meeting, as markets widely expected. Goldman Sachs believes the chair's remarks were broadly consistent with a path of rate increases at every other meeting and a limited total number of increases, and expects a second and final increase in December.
If inflation is higher than Goldman Sachs expects, the Federal Reserve could also raise rates a third time in March 2027; meanwhile, the bank sees downside risks to US growth.
Goldman Sachs expects the European Central Bank to hold steady at its 29 October meeting and make a final increase of 25 basis points in December. Turmoil in French bond markets has tightened euro area financial conditions and may partly substitute for policy tightening; however, further increases in energy prices, particularly natural gas prices, could also prompt the central bank to raise rates in March 2027.

Goldman Sachs expects the Bank of Japan to hold rates steady at its meeting this week, with the next increase in January 2027; the post-meeting press conference will provide clues about subsequent policy.
The Bank of Canada has already raised rates by 25 basis points at this meeting. Goldman Sachs expects that, because growth may be weak in the fourth quarter, the Bank of Canada will pause rate increases in December before a final increase of 25 basis points in January 2027.

Lula's unexpected victory in Brazil's presidential election triggered a sharp repricing of Brazilian assets. Goldman Sachs believes the choice of finance minister and fiscal consolidation plan will be key to subsequent asset performance; the bank expects the government to limit growth in primary spending and raise taxes further, but the measures may be relatively moderate and a shift in the fiscal regime remains difficult.
Israel's Likud bloc performed better than expected, but no party currently holds a majority of seats, and coalition formation is expected to begin. Goldman Sachs believes the main blocs broadly agree on security and foreign policy, making a major shift in policy positions less likely.
The US midterm elections remain a key focus for Goldman Sachs, with prediction markets assigning a relatively high probability to a Democratic sweep. The bank believes the risks of tighter AI regulation and an escalation of the conflict with Iran are not particularly sensitive to the election outcome; if both occur after the election, they could depress share prices and US Treasury yields, while the effect on the broad dollar would be mixed.

Goldman Sachs believes the third-quarter earnings season has been substantially stronger than expected overall: more than half of S&P 500 companies that have reported beat the market consensus for earnings per share, and analysts have raised earnings forecasts more often than they have lowered them. However, performance among key companies in the AI ecosystem has been uneven.
Goldman Sachs expects S&P 500 earnings growth to slow over the next few years as the boost to earnings from the AI investment boom gradually fades. How long the investment cycle can last and how much return it can generate will continue to make AI-related trades volatile.
Recent labor market data also show some AI-related hiring headwinds, and Goldman Sachs expects greater attention to the scope and timing of AI substitution for labor.

Goldman Sachs believes China's property downturn has been deeper than previously expected, but as real estate's share of GDP declines, the sector's drag on real GDP growth will gradually diminish.
The bank expects the drag to fall from 1.8 percentage points in 2026 to 1.3 percentage points in 2027, and to have largely dissipated by 2030.