Goldman Sachs predicts that global markets in 2026 will face a broadly favorable yet increasingly complex environment. Investors will benefit from cyclical tailwinds driven by steady growth and cooling inflation but must also navigate high valuations and volatility in AI-related sectors while seeking protection against potential macroeconomic risks.
The bank's analyst team, led by Kamakshya Trivedi, outlined in a report titled "2026 Market Outlook: Favoring the Heat" that the global economy will exhibit "steady growth, stagnant employment, and stable prices." Goldman Sachs expects robust global growth, coupled with the Federal Reserve's "non-recessionary" rate cuts, to create a supportive backdrop for equities and emerging market assets.
However, markets have already priced in many macroeconomic improvements. Stocks and credit markets—particularly AI-linked segments—show "heated valuations," creating tension with the macro cycle that could lead to heightened volatility and widening credit spreads.
For investors, this means balancing cyclical opportunities with preparations for bumpier conditions. Goldman Sachs recommends diversifying portfolios and employing hedging strategies to mitigate tail risks. Key concerns include potential cracks in the U.S. labor market, latent fiscal worries, and an AI-driven market correction.
1. **Extended Cycle: Growth and Rate Cuts Boost Equities** Goldman Sachs believes steady global growth and the Fed’s measured easing should support equities and emerging markets. While elevated valuations reflect some optimism, constructive cyclical dynamics may ultimately outweigh concerns, though volatility could rise.
2. **Cyclical Tailwinds: U.S. Growth May Surprise** The bank forecasts 2.5% YoY U.S. GDP growth for Q4 2026, above the market’s implied 1.7%. Stronger growth could lift risk assets, especially those tied to U.S. demand and Chinese exports, though labor market fragility remains a sensitivity.
3. **Inflation Retreat: Returning to Target** 2026 may mark the end of post-2021 global inflation pressures. Tariff rollbacks, AI-driven productivity gains, and low-cost Asian supply could push core inflation to pre-2021 lows, offsetting rate pressures from strong growth.
4. **Diverging Central Banks: Uneven Easing** While inflation cooling favors global easing, paths will differ. The Fed, Bank of England, and Norges Bank may cut more than priced in, while emerging markets slash rates. Japan, however, is expected to keep hiking gradually.
5. **AI Frenzy: Volatility and Fragility Ahead** AI’s productivity benefits may emerge, but valuations have overshot fundamentals. Debt-funded data-center expansions could strain credit markets, echoing the 1998–2000 tech bubble’s volatility.
6. **Renminbi’s Gradual Appreciation** China’s trade surplus surpassed $1 trillion in 2025, underscoring the yuan’s undervaluation. Goldman expects continued appreciation, with offshore CNY at 7.033—a one-year high.
7. **Fiscal Risks: Dormant but Not Dead** Mild inflation has calmed fiscal fears, but strained budgets in developed economies remain vulnerable. Expansive policies (e.g., U.S. "tariff rebates") could trigger bond-market turmoil.
8. **FX and Cycles: Slow Dollar Weakness** High-beta G10 (AUD, NZD) and EM currencies (ZAR, BRL, KRW) may outperform amid U.S./China growth surprises. The dollar’s decline is expected to be gradual, with EUR/USD nearing fair value at 1.22. Cheap dollar puts and gold offer hedges.
9. **EM Assets: From "Exceptional" to "Good"** After 2025’s 30% EM equity rally, 2026 returns may moderate. Goldman suggests rotating from tech-heavy markets (e.g., Korea) to domestic-demand plays like South Africa, India, and Brazil.
10. **Late-Cycle Hedging** Key risks include U.S. labor deterioration (downside) and overheating (upside). AI unwinds pose micro risks. Investors are advised to hedge via rates, FX, gold, and volatility products.
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