Goldman Sachs Research Report Analysis: Pro-cyclical Rotation Slows, Maintains 12-Month Equity Overweight but Adopts a More Defensive Tactical Stance

Written by: Rita

The pro-cyclical rotation in asset markets during the summer continues, but momentum is slowing.

On September 2, Goldman Sachs released its Global Opportunities Asset Locator report, maintaining a core stance of overweight equities and underweight credit over a 12-month horizon, while adopting a tactically neutral position on stocks. Global equity markets have been trading sideways since June, with beneficiaries of AI capital expenditures facing sell-offs, while market breadth has significantly improved. 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, though returns may decelerate as earnings growth and revisions peak. In the short term, rate volatility, seasonal weakness, US midterm elections, and geopolitical risks could elevate market volatility.

Earnings Growth Supports Medium-Term Equity Performance, But Return Slope Will Decelerate

Goldman Sachs’ optimistic view on equities is grounded in earnings. Global equity portfolio yields (starting dividend yield plus forward 12-month earnings growth) have risen substantially this year, with regions worldwide achieving double-digit earnings growth and positive revisions.

The peak in earnings growth and positive revisions has likely already passed. Global equity markets have traded in a range since June, marked by significant position reversals among AI capex beneficiaries and outperformance from non-AI sectors. The equal-weighted S&P 500 outperforming the Nasdaq by 16% in June and July serves as a clear signal of improving market breadth. Goldman Sachs forecasts that earnings growth will remain in double digits in 2027, albeit at a lower pace than current levels, which will narrow equity excess returns relative to bonds.

Regarding valuation, ongoing earnings growth has driven valuations to steadily decline, with the MSCI World Index’s 12-month forward P/E ratio dropping notably year-to-date. Goldman Sachs’ equity tail-risk framework indicates that the probability of a major equity drawdown has returned to normal levels, yet the room for another strong rebound is equally limited. This is a typical characteristic of late-cycle economic conditions, where high valuations constrain upside potential, and structural tailwinds from AI may not be fully captured by the model.

Goldman Sachs maintains an overweight rating on Asia and the US, and an underweight on Europe, viewing Asia as having the greatest upside potential, while Europe faces dual headwinds from TTF natural gas prices and political risks.

Long-End Rates Become the Speed Limiter for Equity Markets

Long-term bond yields are approaching or even surpassing post-global financial crisis peaks. This dynamic is supported by three factors: a robust cyclical backdrop, crowding-out effects from capital competition driven by AI investment, and concerns over fiscal sustainability.

Goldman Sachs notes that accelerating nominal growth is the key driver pushing bond yields higher, which simultaneously supports earnings growth and allows equities to better absorb rising yields despite contracting valuations. However, if yields rise too rapidly—driven by soaring energy prices, a more hawkish Fed, or a widening term premium—it could trigger more severe market discomfort. Data shows that the US 10-year Treasury yield rising by more than two standard deviations within three months typically acts as a significant drag on equities.

A more fundamental shift lies in the degradation of bonds’ role as a risk-mitigating tool. Goldman Sachs argues that the current environment resembles patterns seen before the 1990s, where bonds serve primarily as a return generator rather than a hedge. Even if inflation normalizes by year-end and restores the negative correlation between equities and bonds, the hedging efficacy of fixed income may prove weaker than in the past three decades. The protective layer of a traditional 60/40 portfolio is gradually thinning.

Dominance of AI Tech Stocks Increases Portfolio Risk, Making Style Diversification Critical

Over the past three years, the AI-driven rally in tech stocks has elevated their weightings and allocations to levels seen during the corporate bubbles of the 1920s, 1950s, and late-1990s. Despite improved market breadth this summer, tech remains the primary contributor to global equity returns this year. This concentration is equally pronounced in Asia, where semiconductor companies dominate regional performance.

Unlike US mega-cap firms with robust balance sheets and ample cash flows, global semiconductor businesses are highly correlated and deeply cyclical. Should the AI narrative reverse, the risk of correlated declines across the sector will be substantially heightened.

In this context of diminishing bond diversification benefits, intra-equity diversification becomes increasingly vital. The correlation between the S&P 500 and low-volatility, high-dividend stocks has declined sharply, echoing patterns observed during previous tech bubbles. Goldman Sachs recommends a barbell strategy: allocating to globally diversified AI-linked equities on one end, and defensive sectors with high dividends and low volatility on the other. Regional diversification has also proven effective, with non-US equities broadly outperforming the S&P 500 since 2024, led this year by North Asian markets benefiting from accelerated AI capex.

The Allocation Value of Gold and Real Assets Is Becoming More Apparent

Interventions by the US Treasury in foreign exchange and bond markets have triggered a sharp rebound in gold, along with USD policy hedge vehicles such as Bitcoin and the Swiss franc. The Goldman Sachs commodities team maintains its forecast of $4,900 per ounce for fair-value gold by the end of 2026, driven by sustained central bank purchasing and private ETF fund inflows against the backdrop of a hold-by-the-Fed monetary policy.

Gold’s correlation with global portfolio benchmarks has dropped significantly, providing further evidence of hard assets’ diversification value. Goldman Sachs points out that over the past five years, replacing the fixed-income portion of a 60/40 portfolio with gold or a broad real assets allocation has markedly improved risk-adjusted returns.

Goldman Sachs maintains a neutral overall view on commodities. Despite recent escalation in tensions at the Strait of Hormuz, the team forecasts Brent crude oil will fall to $80 per barrel by year-end. Actual oil exports from the Persian Gulf have grown 40% from their March trough, with increased volumes flowing through gray channels alongside price-sensitive net crude imports by China. Consequently, even if Middle Eastern disruptions persist, upside potential for oil prices may remain limited. Gold’s upside trajectory, however, may prove more volatile, as surging call option demand has amplified bidirectional volatility for both bulls and bears.

Goldman Sachs maintains an underweight stance on credit. Credit spreads remain relatively tight, with AI-related debt issuance exerting dual pressure on the credit market: driving up government bond yields while widening credit spreads, particularly for AI-focused issuers relative to their non-AI peers. Historical experience indicates that equities typically outperform credit during late-cycle restructuring and deleveraging phases. Goldman Sachs expects credit spreads to widen moderately by year-end.

Goldman Sachs’ core allocation framework emphasizes: maintain exposure, buy the dips, and manage risk through diversification and selective hedging instruments.

Disclaimer

This article is compiled and interpreted by TechFlow Research from a third-party broker research report (Goldman Sachs, September 2, 2026), incorporating public market information. The ratings, price targets, earnings projections, and related assessments cited herein reflect only the views of the respective brokerage analysts, represent solely the stances of their affiliated institutions, do not constitute the views of TechFlow Research, and are not intended as investment advice.

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