Goldman Sachs has turned bullish on the stock market again, believing that with corporate earnings continuing to grow and equity valuations retreating from summer highs, U.S. and Asian stocks have become more attractive for investment over the coming months.
The core backdrop for this shift is an extremely healthy divergence in the market: stock prices catching up with earnings. This trend has digested the previous valuation bubble and cleared obstacles for future gains.
As the third-quarter earnings season gets underway, Goldman Sachs has upgraded global equities to overweight from neutral on a three-month horizon and maintained its bullish stance over 12 months.
This adjustment does not mean market risks have disappeared. Rising U.S. Treasury yields, higher energy prices and uncertainty surrounding the midterm elections could still heighten market volatility. Goldman Sachs judges that after recent corrections, the relationship between corporate earnings fundamentals and equity valuations has improved, giving investors an opportunity to earn better potential returns while taking on risk.
Earnings Growth Remains the Core Support, Valuation Pullback Offers Buying Space
The Goldman Sachs strategist team led by Christian Mueller-Glissmann said corporate earnings growth remains favorable for the stock market. Since the summer, valuation declines and reduced investor positioning have improved the relationship between the potential gains from further stock rallies and downside risks. If interest rate pressure eases, there is still room for valuation expansion.
The divergence between market performance and corporate earnings is an important backdrop for Goldman Sachs's revised judgment. Standard & Poor's 500 Index has been relatively flat overall since the summer, but corporate earnings have continued to grow. FactSet data shows that the forward 12-month price-to-earnings ratio for the S&P 500 has fallen to 19.1 times from 21.1 times in early June, compared with about 22 times at the start of the year. The valuation pullback means investors are paying less for companies' future earnings.
The third-quarter earnings season will test whether this logic can persist. Goldman Sachs forecasts that third-quarter earnings for S&P 500 constituents will rise 27% year over year, which would mark the third consecutive quarter of earnings growth exceeding 25%. AI infrastructure investment remains an important driver of earnings expansion, with chip and related hardware companies benefiting in particular.
However, earnings growth does not mean all stocks have the same upside potential. Goldman Sachs's earlier research also warned that the strong performance of AI-related stocks has concentrated market gains in a handful of companies, leaving market breadth narrow. If future earnings growth becomes increasingly dependent on the return on AI investment from large technology companies, whether businesses can convert capital expenditure into actual productivity gains and revenue growth will become key to determining the sustainability of the rally.
Goldman Sachs Is Bullish on U.S. and Asian Stocks, but Rate and Energy Risks Remain
This adjustment does not treat all regional stock markets equally. Goldman Sachs maintained an overweight rating on U.S. and Asian equities while keeping an underweight stance on European stocks. This shows that its bullish judgment still includes clear regional selection rather than a simple bet that global equities will rise in unison.
Goldman Sachs also noted that the recent global bond market selloff, energy supply concerns and changes in interest rate expectations remain major risks for the stock market. Middle East supply concerns have pushed oil prices higher, potentially intensifying inflationary pressure and fueling market worries that interest rates will stay elevated for longer. Rising corporate and sovereign debt levels have also added pressure to global bond markets. With U.S. midterm elections approaching, the currently relatively low market volatility could rise again.
These risks form a key trade-off with the valuation pullback. If interest rate pressure eases, lower equity valuations may provide room for further market gains. Conversely, if oil prices continue to rise and bond yields keep climbing, corporate financing costs and equity valuations could come under pressure again. Therefore, Goldman Sachs's shift is built on the premise that earnings growth continues to materialize and financial conditions do not deteriorate further.
Investment Strategy Shifts to Barbell Allocation, Bonds Regain Attention
In terms of portfolio allocation, Goldman Sachs favors a barbell strategy: technology stocks at one end and bond-like equities at the other. The former allows participation in earnings growth driven by technology and AI investment, while the latter can benefit when interest rates ease and provide some defensiveness if technology stocks pull back or growth concerns intensify.
Goldman Sachs also upgraded government bonds to overweight on a 12-month horizon. The bank said bonds are expected to gradually shift from a drag on portfolios to a hedging tool. However, Goldman Sachs's view on bonds also requires distinguishing by maturity: in an environment where short-term rates and the bond market may remain volatile, the bank prefers shorter-duration bonds and cash assets.
This portfolio approach reflects that Goldman Sachs does not view the current environment as a one-sided risk-on rally. On one hand, it is optimistic about equity opportunities created by corporate earnings and valuation adjustments. On the other hand, it still hopes to address interest rate and growth risks through bonds and defensive assets.