Goldman Sachs Exchanges: Outlook 2026 | Episode 3: Assets and Allocation

Global Equity Market Outlook (2026)

• Cycle Position: Current market phase identified as "optimism," driven by profit growth rather than valuation expansion; expected to persist through 2026 despite potential future entry into a "despair" phase if a recession occurs.
• Performance Drivers: Profit growth is the primary engine for returns, supported by a benign economic backdrop, moderating inflation, and declining US interest rates.
• Geographic Allocation: Highest return forecasts assigned to Emerging Markets (EM) and Asia, specifically Northern Asia, citing better growth prospects, a weaker dollar, and undervaluation relative to US markets.
• Sector Rotation: AI investment focus broadening beyond "hyperscalers" (infrastructure) to the "application layer," industrials (data centers, energy), and financials (benefiting from lower short-term and higher long-term rates).
• Risk Assessment: High valuations noted as a risk factor, but not viewed as a signal for imminent drawdown absent a specific macro trigger or shock.

Currencies and Interest Rates

• US Dollar: Expected to depreciate ~3% trade-weighted in 2026; remains ~15% overvalued compared to the 22% overvaluation recorded at the start of 2025.
• Rate Environment: Viewed as the "tail end of global easing," with most major central banks (including the ECB) holding rates steady; cuts anticipated only in the US, UK, and select EM jurisdictions (e.g., Brazil, Hungary).
• Bond Yields: US 10-year yields forecast to remain range-bound around 4.20%; German yields expected to rise to ~3.25% due to fiscal impulse, while UK yields may decline.
• Inflation Dynamics: Broad disinflation anticipated to keep inflation anchored, reducing fiscal risk premiums and making bonds a more effective hedge for long-risk portfolios.
• Market Macro Tension: Significant divergence noted between a pro-cyclical macro outlook and stretched market valuations/credit spreads, suggesting potential for higher equity volatility despite positive growth.

Commodities Strategy

• Gold: Base case forecast for a 10% price increase to $4,900 by year-end; drivers include sustained central bank purchases (geopolitical diversification) and anticipated Fed rate cuts reducing opportunity costs.
• Oil: Prices expected to trend lower in 2026 to rebalance oversupplied markets, with recovery anticipated in 2027; upside risks include supply disruptions or OPEC cuts.
• Energy & AI: AI-driven data center power demand (outpacing GDP growth) creating tight local US power markets; strongest commodity trade identified as long positions in local US power markets, particularly around Virginia.

Portfolio Allocation and Risk Management

• Strategic Stance: Portfolio remains overweight equities for 2026, leveraging structural optimism and low unemployment despite elevated valuations.
• Diversification Mandate: Increased emphasis on geographic and sector diversification to mitigate concentration risk in US equities and high single-name exposure.
• Alternative Assets: Recommendation to selectively ramp up allocations to alternatives to reduce portfolio correlation with the business cycle.
• Credit Avoidance: Explicit caution against carry trades and tight credit spreads due to poor convexity in a late-cycle environment; preference for equity risk over credit risk.
• Volatility Hedging: Opportunity identified for selective hedges given current record-low volatility levels across major asset classes.