What comes next after major central banks pause?

  • The Federal Reserve left interest rates unchanged at this meeting, in line with consensus expectations. Goldman Sachs believes the chair’s remarks were broadly consistent with a path of rate hikes at every other meeting and a limited total number of hikes. It continues to expect a second and final hike in December.
  • US growth faces downside risks. However, if inflation exceeds Goldman Sachs’ forecast, the bank believes a third rate hike could occur in March 2027.
  • Goldman Sachs expects the European Central Bank to hold rates steady this week and deliver a final 25-basis-point hike in December. Turmoil in the French bond market has tightened euro area financial conditions and could substitute for some policy tightening, creating downside risk to the forecast of a hike in December. If energy prices, especially natural gas prices, rise further, a hike in March 2027 is also possible.
  • The Bank of Canada has raised rates by 25 basis points at this meeting. Goldman Sachs expects the bank to pause in December amid potentially weak fourth-quarter growth, then deliver a final 25-basis-point hike in January 2027. The Bank of Japan is expected to pause this week and raise rates again in January 2027.

What are markets watching after the election surprises?

  • Brazilian President Lula’s surprise election victory triggered a significant repricing of Brazilian assets. Goldman Sachs believes the choice of finance minister and the fiscal consolidation strategy will influence subsequent asset performance.
  • The bank expects Lula to take steps during his fourth term to constrain growth in primary spending and raise taxes further, but the measures may be limited in scope. With the tax burden already high, a fundamental transformation of the fiscal system remains difficult.
  • Israel’s Likud party performed better than expected, but no party has won a majority of seats so far, and a coalition government may be needed. Goldman Sachs believes the main blocs are broadly aligned on security and foreign affairs, making a major shift in policy positions on those issues unlikely regardless of the final outcome.
  • Next week’s US midterm elections remain a focus: prediction markets continue to assign a high probability to a Democratic sweep, but Goldman Sachs believes the risks of tighter AI regulation and an escalation of the Iran conflict are not particularly sensitive to the election outcome. If both risks materialize after the election, the bank’s scenario assessment is that equity prices and US Treasury yields could come under pressure, while the effect on the broad US dollar would be mixed.

Why might the AI trade remain volatile despite earnings beats?

  • Goldman Sachs believes overall third-quarter earnings were significantly stronger than expected, but results from key companies in the AI ecosystem were mixed. The bank estimates that, among S&P 500 companies that have reported, more than half posted earnings per share above consensus, and analysts raised earnings forecasts more often than they lowered them.
  • Looking ahead, Goldman Sachs expects the boost to earnings from the AI investment boom to gradually diminish and S&P 500 earnings growth to slow over the coming years. The duration of the investment cycle and its returns remain reasons the bank expects the AI trade to stay volatile.
  • Recent labor market data have also shown some signs of AI-related pressure on hiring. Goldman Sachs expects more discussion about the extent and timing of AI replacing labor.

When will the drag from Chinese real estate on growth ease?

  • Goldman Sachs believes the downturn in Chinese real estate is deeper than previously expected, but as real estate’s share of GDP declines, the sector’s drag on real GDP growth will gradually ease.
  • The bank expects the drag to narrow from 1.8 percentage points in 2026 to 1.3 percentage points in 2027, and to largely dissipate by 2030.