Will US Stocks Outperform in 2026?

2025 Market Performance Recap

• U.S. stocks rose 18% in 2025, significantly exceeding the firm's 6% base case and 14% favorable scenario estimates.
• Despite strong U.S. growth and earnings (12%), U.S. equities underperformed global peers, with non-U.S. developed markets returning 22% and China returning 33%.
• Global outperformance was driven by price appreciation not supported by earnings: non-U.S. emerging market earnings rose only 2%, while China's earnings contracted despite a 33% equity gain.

2026 Earnings and Return Forecasts

• Goldman Sachs projects U.S. earnings growth to lead, positioning U.S. equities as the middle ground for returns between non-U.S. developed markets and emerging markets.
• Base case return expectations for 2026 are 7% for U.S. equities, 6% for non-U.S. developed markets, and 8% for emerging markets (excluding China).
• Non-U.S. developed markets are expected to lag both in earnings growth and total returns compared to U.S. and emerging markets.
• The firm expects emerging markets excluding China to outperform, citing a strategic shift in portfolio allocation toward these regions.

China Market Outlook

• Goldman Sachs maintains a negative view on Chinese assets due to a disconnect between official GDP growth figures (approx. 5%) and independent estimates (1% to 3% by Rhodium Group and Jonathan Anderson).
• Trend growth forecasts for China are revised to 3% currently, declining to 2% by 2035, potentially trailing U.S. trend growth of 2.4% if AI contributions are included.
• The 33% equity rally in China is deemed unsustainable given negative earnings growth, though the firm notes a price floor exists due to capital controls and state encouragement for domestic investment in equities and gold.

AI Investment Themes and Valuation Risks

• The firm identifies "bubble trouble" within the AI ecosystem, particularly in private markets characterized by vendor financing and easy access to credit for firms with unproven products.
• Public market expectations for AI's short-term productivity impact (e.g., 21% improvement in childcare) are viewed as unrealistic hype compared to the more grounded valuation of public tech stocks.
• Despite high concentration in the "Magnificent 7," the firm found no statistical significance linking S&P 500 concentration to poor forward-looking returns in 2025.
• Investors are advised to maintain broad market cap exposure to the S&P 500 rather than over-concentrating in AI or the Magnificent 7, noting the index's rebalancing mechanism effectively swaps underperformers for growing companies.

Asset Class Recommendations: Gold, Commodities, and Fixed Income

• Gold and Bitcoin are not recommended as strategic portfolio hedges, as gold fails to generate cash flow and hedges inflation only 50% of the time, whereas U.S. equities hedge inflation 100% of the time.
• Gold prices face a floor due to ongoing central bank buying (e.g., China), but the current price run is considered unsustainable for long-term strategic allocation.
• U.S. Treasuries remain the preferred "sleep well" hedge for portfolios, particularly in deflationary environments where they outperform UK treasuries as a hedge.
• Private assets (equity, credit, infrastructure) are recommended but with realistic return expectations of only a few percentage points above the S&P 500, rather than mid-teens.

Long-Term Valuation and Economic Context

• The firm rejects the "mean reversion" myth, noting that high equity valuations across major markets have not historically predicted lower returns over the next 1–5 years.
• Reduced GDP volatility since the 1990s (recession time dropping from 18-19% to 8% of the time) supports higher market valuations and stable earnings.
• Equity risk premiums appear fair relative to bond yields when viewed against post-1992 metrics rather than post-WWII benchmarks.
• Long-term return assumptions for U.S. equities are set at approximately 6% over the next five years, driven by sustained margin expansion and AI-driven efficiency, though double-digit growth is not projected.

Strategic Portfolio Architecture

• The firm maintains a strategic overweight to U.S. assets while insisting on diversification into non-U.S. developed and emerging markets.
• "Stay invested" is the core recommendation, advising deployment of cash on the sidelines during volatility to maintain strategic asset allocation.
• Tactical tilts are advised for specific emerging markets such as India, Mexico, and South Africa, which offer stronger steady earnings or favorable currency dynamics.
• The S&P 500 is recommended as a difficult-to-beat benchmark for passive, tax-efficient, and broad market exposure.