Goldman Sachs partner Mark Wilson said global equities are facing a clearer upside opportunity into year-end, arguing that investors do not need to wait for the U.S. midterm elections to move back into risk assets. He said markets have already priced in stagflation risk to a large extent, while a milder Goldilocks economic backdrop is beginning to emerge.
Goldman tied that view to recent market action. The firm said AI-driven FOMO has returned. After Meta released Muse, expectations for large-scale consumer adoption of AI moved forward, helping AI-linked assets including the Nasdaq stage a strong upside break on Monday. That came after three months of consolidation and position cuts following a historically strong second quarter.
Higher yields have not broken the equity rally
At the same time, U.S. bond yields have moved higher again. Goldman said this round differs from earlier moves that were tied to competition for capital from government spending and AI-related capital expenditure, or to inflation pressure coming from energy prices. This time, the rise has been backed mainly by stronger-than-expected data including purchasing managers’ index, or PMI, readings, reflecting continued strength in U.S. nominal growth.
The bank also noted that stocks have held their gains despite sharp swings in yields. A common market concern is that the seven-month rise in the U.S. 10-year Treasury yield, the longest streak in 50 years, will eventually weigh on equities. Some investors have also preferred to wait until tensions in the Gulf cool and the midterm elections pass safely before adding risk exposure.
Goldman pushed back on that consensus. It said meaningful improvement in inflation, economic growth and corporate earnings is laying the groundwork for a year-end equity rebound.
Cooling inflation and AI as a disinflation driver
On inflation, Goldman said higher energy prices linked to the Iran conflict had masked the decline in core inflation for some time.
Now, according to the firm, tariff pass-through effects are fading and tighter financial conditions caused by rate hikes are already working through the economy. If shipping flows through the Strait of Hormuz return to normal, energy prices could face notable downside risk. Goldman added that Iran’s biggest negotiating leverage window is expected to end around Nov. 2, leaving room for a fresh disinflationary energy narrative to emerge.
More importantly, Goldman described Meta’s Muse product as the first shot of disinflation in consumer goods and services. Its research on the coming era of commercial agentic AI suggests technological progress is materially reducing consumer-side costs, and that effect could become a more important disinflation driver than falling energy prices.
Softer growth expectations could restrain central banks
Goldman said U.S. economic activity has been more resilient than expected over the past six months despite uncertainty tied to geopolitics and energy prices. But research from Goldman chief economist Jan Hatzius indicated that this upside risk is fading and that the second derivative of growth will start to slow.
As tax-cut related fiscal support fades, higher gasoline prices and rising mortgage rates are expected to hit some sectors and consumers. Goldman also said the capital spending cycle in AI should continue, but its pace of growth is likely to slow.
Combined with expectations for easing inflation, that leaves room for central banks to raise rates by less than current market pricing implies. Wilson said this is no longer the time to worry about rising yields, adding that such concern would have made sense seven months ago.
Core earnings remain a pillar for valuations
On the debate over whether corporate earnings are sustainable and whether the market is facing an earnings bubble, Goldman U.S. strategy head Ben Snider said some companies are showing excess profits, but the market as a whole has not entered an earnings bubble.
The bank highlighted three points for investors. First, record "other income" should not command a high premium. Second, memory-chip names and some semiconductor stocks are indeed in an excess-profit phase. Third, through at least the end of 2027, core corporate earnings are still likely to remain notably strong even if growth moderates, giving valuations fundamental support.
Goldilocks, not stagflation
Goldman said markets had been trying to price a combination of much slower growth, weaker earnings and higher rates, but macro data do not support that full stagflation narrative. Instead, slowing growth, lower inflation risk, a softer central-bank stance and a year of valuation compression have combined to create a more constructive setup.
The firm said the current environment closely resembles the market tug-of-war seen during the major technological transition of the late 1990s. If a Goldilocks outcome ultimately arrives, with growth neither too hot to reignite inflation nor too weak to trigger recession, the historical pattern of a year-end stock rally after midterm elections could still hold.
Wilson said investors should not wait for the midterms to end before acting. As the threat from energy prices fades, he added, European and U.K. equities are also in a good position to take part in the rally.