Which Equity Markets Will Outperform?

U.S. Market Outlook for 2026

• Goldman Sachs forecasts U.S. GDP growth of 2.8%, significantly above consensus.
• Tailwinds driving performance:
  • Easier financial conditions following Federal Reserve rate cuts.
  • Strong capital expenditure (capex) cycles fueled by artificial intelligence (AI) and credit creation.
  • Fading drag from tariffs combined with strong fiscal impulses from tax refunds.
  • Ongoing deregulation, particularly within the banking sector.
• Valuation and Sentiment Risks:
  • Gross leverage in U.S. assets has reached five-year highs.
  • Short VIX positioning is at levels approaching year-to-date highs.
  • Risk appetite indicators suggest consensus views are becoming widely held, warranting caution.
• Structural Support:
  • Money supply growth is outpacing nominal GDP, creating a technical backdrop supportive of financial assets.
  • While U.S. equity multiples remain elevated due to tech sector dominance, Goldman Sachs views the earnings growth as merited.
  • The dollar is estimated to be approximately 15% overvalued based on broad models, though this premium has moderated from last year's peaks.
• Forward-Looking Risks:
  • Central bank independence and political interference remain key threats to the U.S. narrative.
  • Potential labor market weakness could trigger a slowdown despite fiscal stimulus.
  • Future equity supply, specifically mega-cap IPOs later in the year, could test market absorption.

Europe and Asia Allocation Strategy

• Structural Shift: Excess savers in Europe and Asia are no longer recycling capital into U.S. assets at previous rates due to:
  • Geopolitical concerns and legacy sanctions reducing exposure to U.S. Treasuries.
  • Increased domestic fiscal spending, particularly on defense, reducing the need to fund external deficits.
• European Outlook:
  • German industrial orders indicate defense spending is proceeding domestically, boosting local growth.
  • European equities are viewed as having a low performance bar due to prevailing pessimism.
  • Currency Forecast: The Euro is expected to strengthen modestly, aligning with a shallow U.S. dollar depreciation (projected to reach 1.20).
  • Primary Risk: China's shift toward export-driven growth post-third plenum poses a competitive threat to European industries.
• Asian and Emerging Markets (EM):
  • China: Policymakers are expected to introduce further macro and fiscal easing; AI themes and structurally cheap valuations drive a bullish thesis.
  • Diversified EM: Positive outlooks for markets including Korea, Taiwan (leveraging AI/tech themes), Brazil, India, and South Africa.
• Regional Comparison: Goldman Sachs forecasts returns for U.S., Europe, and Asia within a few percentage points of each other, remaining positive across all three regions.
• Catalyst for Divergence: Outperformance by non-U.S. equities would require a reawakening of FX markets driven by concerns over U.S. institutional quality or deeper U.S. labor market deterioration.

Hedging and Protection Strategies

• Fixed Income: U.S. Treasury rates are viewed as a viable portfolio diversifier, particularly if the labor market weakens or the easing cycle is shallower than anticipated.
• Credit Markets:
  • Credit spreads are currently at tight percentiles, making credit shorts less attractive despite incoming demand from non-specialists.
  • High levels of issuance have been well-absorbed, suggesting defaults are not imminent enough to trigger a successful spread widening.
• Gold:
  • Investment Thesis: Supported by "de-dollarization," fears of currency debasement due to fiscal stimulus, and deglobalization/geopolitical risks.
  • Flow Dynamics: Central banks, ETFs, and private wealth clients are increasing allocations from historically low levels.
  • Risk Factors: Drawdowns are likely when sentiment is overly consensual, but dips are viewed as buying opportunities.
  • Bearish Scenarios: Higher real U.S. rates or a restoration of confidence in fiat currencies would negatively impact gold.

Transcript Metadata and Disclaimers

• Date: Wednesday, January 14, 2026.
• Speaker: Kunal Shah, Co-CEO of Goldman Sachs International.
• Disclaimer: The transcript contains forward-looking statements; past performance is not indicative of future results; no investment advice is provided.