• Goldman Sachs (GS) remains overweight equities over the next 12 months while underweighting credit as late-cycle risks increase.
  • The bank expects solid earnings, slowing but resilient growth, and low U.S. recession risk to support stocks, but warns that high bond yields, fiscal concerns, and sticky inflation could limit gains.
  • Goldman recommends diversification through low-volatility stocks, high-dividend shares, gold, and real assets.

A Constructive but Selective Equity View

Goldman Sachs is sticking with its pro-equity stance, but with a more cautious and diversified approach than in earlier stages of the cycle. The firm’s co-head of Global Banking & Markets, Ashok Varadhan, said U.S. equities could “grind higher,” supported by a resilient nominal economy, ongoing AI-related productivity expectations, and a view that the Federal Reserve is more likely to hold rates than deliver further hikes later this year.

The bank’s latest positioning reflects a belief that earnings and economic growth remain solid enough to support stocks over the next 12 months. However, the path is far from straightforward. Long-dated Treasury yields have been climbing, with the 10-year yield recently at 4.649% and the 30-year at 5.17% as of August 26, according to CNBC. That, combined with fiscal deficits, persistent inflation, and heavy debt issuance, makes broad market gains less certain and leaves credit looking less attractive on a risk-adjusted basis.

The Rates Conundrum

The key offset to Goldman’s equity optimism is the rates market. The firm’s Treasury desk has been flagging that fiscal pressures are likely to remain problematic for years, increasing the term premium—the extra yield investors demand to hold long-dated bonds. A 10-year Treasury auction recently cleared at its highest yield since 2007, underscoring how sensitive markets are to inflation and supply concerns.

Inflation is still running above the Fed’s 2% target. July core PCE inflation was 3.3% year over year and 0.2% month over month, keeping the monetary-policy outlook uncertain even as growth remains resilient. This creates a delicate balance: if inflation stays sticky, the Fed may be forced to keep rates higher for longer, which could pressure equity valuations and increase borrowing costs across the economy.

Credit: Solid Fundamentals, Difficult Technicals

In credit markets, Goldman sees a tension between solid corporate fundamentals and challenging technical conditions. Heavy issuance—particularly related to financing AI infrastructure—has made higher-rated, longer-duration credit relatively vulnerable to elevated rates. The firm has shifted its preference toward selected BBB investment-grade bonds and B-rated high-yield debt, while moving CCC-rated credit to underweight.

Goldman estimates that corporate borrowing associated with AI infrastructure could reach roughly $250 billion this year and potentially $400 billion next year. That supply comes on top of large Treasury issuance, creating competition for investor capital and reinforcing upward pressure on long-term yields.

A Late-Cycle Playbook

This is a familiar late-cycle pattern: equities can keep rising when earnings growth is intact, but elevated rates and narrowing credit compensation make leadership more fragile and favor diversification. Goldman specifically highlights lower-volatility equities, dividend payers, gold, and real assets as ways to reduce exposure to an adverse mix of inflation, rates, and growth surprises.

The firm’s rate strategists favor a steeper Treasury curve: front-end yields could fall if inflation eases and rate-hike expectations fade, while the long end remains pressured by supply and fiscal risk. For households and businesses, elevated long-term yields feed into mortgage rates, auto-loan costs, credit-card borrowing, and corporate refinancing costs.

The central risk to Goldman’s outlook is that inflation stays sticky or rises again. That could force a more restrictive Fed response, lift real yields further, pressure equity multiples, weaken credit performance, and raise recession risk. Conversely, a clean disinflation path with stable employment would validate the bank’s base case: no further rate hikes, firmer front-end bond prices, continued—if more modest and selective—equity gains, and still-manageable defaults.

As always, the coming months will be data-dependent. Markets will be watching inflation releases, employment numbers, Fed guidance, Treasury auctions, and corporate debt supply. And with AI-related capital expenditure continuing to drive both earnings and debt issuance, the productivity promise of that investment will remain a central question for investors.