Goldman Sachs has upgraded its three-month outlook on global equities to “overweight” from “neutral,” noting that resilient earnings growth and more attractive valuations have created an opportunity for investors to increase exposure ahead of the third-quarter earnings season.
The change comes after a recent market pullback driven by rising oil prices, renewed inflation concerns, and fears that central banks may keep interest rates elevated for longer. A global bond selloff, fueled partly by mounting corporate and sovereign debt concerns, has added to pressure on financial markets in recent weeks.
Despite these headwinds, Goldman believes the decline in equity prices has improved the risk-reward balance for stocks, bringing its near-term assessment into line with its more bullish 12-month outlook.
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The bank said earnings growth continues to support equities, while lower valuations following the recent correction provide a more attractive entry point for investors positioning for the coming months.
However, the upgrade does not signal that Goldman expects market conditions to become less volatile. The bank identified elevated interest rates and energy prices as the main near-term risks, warning that persistent inflation could undermine expectations for monetary easing and place further pressure on equity valuations.
Oil Prices, Bond Yields and Earnings in Focus
The outlook for global equities is being shaped by competing forces. On one side, corporate earnings remain a source of support, while the recent decline in share prices has made valuations more appealing. On the other, geopolitical supply concerns in the Middle East have pushed oil prices higher, increasing the risk that inflation will remain elevated.
Higher energy prices can affect equities through several channels. They raise costs for businesses and households, potentially weakening consumer spending and corporate profit margins. If the resulting inflation prevents central banks from cutting interest rates, investors may also demand higher returns to hold equities, putting pressure on valuations.
The bond market has added another layer of uncertainty. Rising concerns about corporate and sovereign borrowing have contributed to a selloff in global bonds, unsettling investors as government borrowing needs and debt-servicing costs remain under scrutiny.
Higher bond yields can make fixed-income assets more competitive with equities and increase the discount rates used to value future corporate earnings. This can be particularly challenging for companies whose valuations depend heavily on profits expected far into the future.
Goldman’s upgrade suggests the bank believes these risks are already sufficiently reflected in equity prices to justify a more constructive three-month stance. The coming earnings season will be an important test of that view, as investors assess whether corporate results and forward guidance can sustain current profit-growth expectations despite higher energy costs and borrowing rates.
A deterioration in earnings or a further increase in yields could undermine the case for a recovery. Conversely, results that demonstrate resilience in corporate profitability could help support share prices even if macroeconomic conditions remain difficult.
Asia and US favored over Europe
Goldman maintained its regional preference for Asia and the United States, where it remains “overweight,” while retaining an “underweight” position on Europe.
The positioning indicates that the bank continues to see more attractive opportunities in Asian and US equities relative to European stocks, although it did not provide further details in the supplied report explaining the precise drivers of that regional allocation.
The bank also warned that uncertainty surrounding the US midterm elections could increase market volatility from currently low levels. Political uncertainty can affect expectations for fiscal policy, regulation and government spending, potentially creating additional swings in asset prices as investors reassess the outlook.
Goldman’s broader strategy is designed to account for these competing risks rather than rely on a single market outcome. It favors a “barbell strategy,” combining technology stocks at one end of a portfolio with bond-like equities at the other.
Technology stocks can offer exposure to earnings growth and structural demand for digital services, but they may also be sensitive to changes in interest rates and investor appetite for risk. Bond-like equities, which tend to offer characteristics associated with more defensive investments, can provide a counterweight if economic growth weakens or technology shares come under pressure.
Goldman said both sides of the strategy could benefit from interest-rate relief, while the defensive component could help cushion a technology selloff or a deterioration in growth expectations.
The approach reflects the difficulty of positioning portfolios when the outlook for corporate earnings remains supportive but inflation, energy prices and bond yields continue to pose risks. Rather than relying entirely on growth-oriented stocks, the bank is advocating a combination of assets intended to perform under different market conditions.
Government Bonds Regain Appeal As Portfolio Hedge
Alongside its equity upgrade, Goldman raised its 12-month outlook on government bonds to “overweight,” signaling that it expects sovereign debt to play a more constructive role in portfolios over the coming year.
The bank said: “We believe bonds should gradually move from portfolio headwind to hedge.”
The assessment suggests Goldman expects government bonds to regain some of their defensive value after the recent selloff. When bond prices fall and yields rise, fixed-income holdings can weigh on diversified portfolios alongside equities, weakening the traditional relationship in which government debt helps offset losses in stocks.
If inflation pressures ease and interest rates move lower, government bonds could become more attractive through a combination of price appreciation and income. They could also provide protection if economic growth weakens and investors seek safer assets.
That outlook remains conditional, however. Persistently high oil prices could keep inflation elevated, limiting the scope for monetary easing and delaying a recovery in bond prices. Continued concerns about government borrowing and debt-servicing costs could also sustain pressure on yields.
Goldman’s simultaneous preference for equities and government bonds indicates that it sees opportunities across both asset classes over different time horizons. Its three-month equity upgrade is based on earnings support and improved valuations after the correction, while its 12-month bond upgrade reflects the expectation that government debt can gradually resume its role as a portfolio hedge.