Goldman Sachs Keeps a 12-Month Overweight on Stocks, but Turns More Defensive tactically

Goldman Sachs said on September 2 that the summer’s cyclical rotation is still running, but it is losing steam. In its Global Opportunity Asset Locator report, the bank kept a 12-month overweight on equities and an underweight on credit, while moving its tactical view on stocks to neutral. Global equities have traded sideways since June. AI capex beneficiaries have been sold, while market breadth has improved sharply. The equal-weight S&P 500 outperformed the Nasdaq by 16% in June and July, which Goldman read as a clear sign that participation is broadening. Even so, the bank said sustained earnings growth should keep stocks ahead of bonds and credit over the next 12 months, though returns may slow as earnings growth and earnings revisions peak. Goldman’s case for equities starts with earnings. Global equity carry — initial dividend yield plus forward 12-month earnings growth — has risen sharply this year, with all regions posting double-digit earnings growth and positive revisions. Still, the bank believes the peak in both earnings growth and revisions is likely behind us. It expects 2027 earnings growth to remain in the double digits, but below current levels, which would narrow equities’ relative outperformance versus bonds. Valuations have already adjusted. The MSCI World Index’s 12-month forward P/E has fallen materially this year as earnings have pulled valuations lower. Goldman’s tail-risk framework shows the odds of a large equity drawdown have returned to normal, but the room for another strong rebound also looks limited. That, the bank said, is typical of the late-cycle phase: high valuations cap upside, while AI-related structural support may not be fully captured by its framework. Regionally, Goldman stayed overweight Asia and the U.S., and underweight Europe. It said Asia has the largest upside, while Europe faces pressure from both TTF natural gas prices and political risk. The other major brake on equities is the long end of rates. Bond yields are now close to, or above, post-global-financial-crisis highs. Goldman pointed to three drivers: a strong cyclical backdrop, capital crowding from AI investment, and concern over fiscal sustainability. It said faster nominal growth is helping push yields higher, but also supporting earnings, which lets equities absorb some of the move even as valuations compress. The risk is speed. If yields rise too fast — for example on a surge in energy prices, a more hawkish Federal Reserve, or a higher term premium — market discomfort could intensify. Goldman noted that a rise in the 10-year Treasury yield of more than two standard deviations over three months has typically been a meaningful drag on stocks. The bank also argued that bonds are becoming less effective as a risk hedge. The current setup, it said, looks more like the pre-1990s regime, when bonds were mainly a source of income rather than a reliable offset to equity risk. Even if year-end disinflation restores a negative stock-bond correlation, bond hedging may still be weaker than it was over the past 30 years. The classic 60/40 portfolio, in Goldman’s view, is losing some of its protective layer. AI-led tech concentration is another risk. Over the past three years, the AI rally has pushed weights and allocations in related stocks to levels seen during the tech bubbles of the 1920s, 1950s and late 1990s. Market breadth improved over the summer, but tech still made the biggest contribution to global equity returns this year. The concentration is also visible in Asia, where semiconductors have dominated regional performance. Unlike U.S. hyperscalers, which have strong balance sheets and ample cash flow, global semiconductor companies are highly correlated and highly cyclical. If the AI trade turns, the risk of synchronized declines across the group rises. With bond protection fading, diversification inside equities matters more, Goldman said. The bank said the correlation between the S&P 500 and low-volatility, high-dividend stocks has dropped sharply, resembling the dot-com era. Its preferred setup is a barbell: own global AI-related stocks on one side, and defensive high-dividend, low-volatility sectors on the other. Regional diversification is already helping. Non-U.S. stocks have broadly outperformed the S&P 500 since 2024, led this year by North Asian markets that have benefited from faster AI capex. Gold has also been repriced. Goldman said intervention by the U.S. Treasury in FX and bond markets helped trigger a strong rebound in gold, as well as in other dollar policy hedges such as bitcoin and the Swiss franc. Its commodities team kept a $4,900-an-ounce fair value estimate for gold by end-2026, citing continued central bank buying and a return of private ETF flows if the Federal Reserve stays on hold. Gold’s correlation with global portfolio benchmarks has fallen sharply, which supports the case for real assets as diversifiers. Over the past five years, replacing the bond sleeve in a 60/40 portfolio with gold or a broader real-asset basket materially improved risk-adjusted returns, Goldman said. On commodities overall, the bank stayed neutral. Even after the recent escalation in the Strait of Hormuz, it expects Brent crude to fall to $80 a barrel by year-end. It said actual Gulf oil exports are already up 40% from the March low, helped by higher flows through gray channels, and that price-sensitive Chinese net crude imports could limit further upside even if Middle East disruptions persist. Gold may stay more volatile, with both upside and downside swings widening after a surge in call-option demand. Credit remains underweight. Spreads are still tight, and debt issuance tied to AI capex is pressuring credit on two fronts: higher government bond yields and wider credit spreads, especially for AI issuers versus non-AI peers. Goldman expects credit spreads to widen modestly into year-end. Its core playbook is unchanged: stay invested, buy dips, and manage risk with diversification and selective hedges.