Goldman Sachs Exchanges: Outlook 2026 | Episode 3: Assets and Allocation

Episode Summary

Executive Summary: Goldman Sachs’ Outlook 2026 episode argues that a still-benign global growth backdrop should support equities, commodities, and selected FX and rates trades, but with more emphasis on diversification than concentration. AI remains central, yet its market impact is broadening beyond hyperscalers into applications, energy, and industrial infrastructure. High valuations, tight spreads, and late-cycle conditions create upside with volatility risk.

Main Topics: Global equities supported by growth, falling inflation, and lower rates (Priority: 5/5): Peter Oppenheimer said an extended growth cycle, moderating inflation, and lower rates should support equities in 2026. Returns are expected to come more from profit growth than valuation expansion, with high valuations a key restraint. AI theme broadens beyond hyperscalers (Priority: 5/5): AI is expected to remain a major market driver, but leadership should expand from the mega-cap infrastructure providers into application-layer companies, energy, data centers, industrials, and productivity beneficiaries. Diversification away from U.S. concentration and into EM/Asia (Priority: 4/5): The team expects continued geographic and sector diversification. EM and Asia, especially Northern Asia, are viewed as higher-return regions than the U.S. due to better growth, weaker-dollar tailwinds, and stronger profit growth. Dollar weakness continues, but at a slower pace (Priority: 4/5): Kamakshia Trivedi said the dollar remains overvalued and should depreciate further in 2026, though less than in 2025. The move is framed as a pro-cyclical rotation into other currencies rather than a broad collapse. Global easing is near the end; bonds anchored by disinflation (Priority: 4/5): The rate-cut cycle is largely over outside a few economies. With disinflation expected to persist, bond yields should stay relatively anchored, though country-specific moves differ, such as higher German yields and lower UK gilt yields. Gold remains a high-conviction commodity trade (Priority: 5/5): Don Strouven expects gold to extend its rally due to structural central-bank buying and additional Fed cuts lowering the opportunity cost of holding gold. He sees upside if private investors join the diversification trend. Late-cycle positioning argues for equities over credit and for hedges (Priority: 5/5): Christian Mueller-Glissman said investors remain bullish but should protect portfolios with diversification and alternatives. He warned against credit carry trades because tight spreads and poor convexity make them vulnerable if growth slows.

Key Arguments: A benign macro backdrop of growth plus moderating inflation is constructive for risk assets, especially equities. Equity gains in 2026 should be driven more by earnings/profit growth than by further valuation multiple expansion. The AI trade is not over; it is broadening from hyperscalers to applications, utilities, energy, industrial infrastructure, and productivity beneficiaries. Diversification is increasingly important because U.S. asset concentration and valuations are elevated after years of strong performance. EM and Asia, particularly Northern Asia, may outperform the U.S. on better growth, weaker-dollar effects, and stronger profit growth. The dollar is still overvalued and should weaken further, but only modestly compared with 2025. Global central banks are mostly done easing, so yields should generally be range-bound, with disinflation helping anchor longer rates. Gold should rise because central-bank accumulation is durable and lower Fed rates reduce holding costs. Oil is likely to soften in 2026 because the market remains oversupplied; recovery is more plausible in 2027 unless supply is disrupted. The best AI-related commodity trade is local U.S. power markets, where data-center demand is tightening supply faster than grids can respond. Investors should stay overweight equities but protect that exposure with diversification, alternatives, and selective hedges rather than reaching for credit carry. Credit is unattractive late cycle because tight spreads offer limited upside and poor downside protection if macro momentum weakens.

Data Points: Dollar overvaluation at start of 2025: 22% overvalued - Kamakshia Trivedi described the dollar as still expensive despite some depreciation earlier in 2025. Dollar overvaluation after 2025 depreciation: about 15% overvalued - She said the 7% to 8% trade-weighted decline in 2025 reduced overvaluation but did not eliminate it. Expected dollar move in 2026: 3% trade-weighted depreciation - Goldman expects a smaller, broader decline in the dollar this year. 2025 dollar depreciation: 7% to 8% trade-weighted - Referenced as the prior-year move that reduced overvaluation. Gold forecast: $4,900/oz by end-2026 - Don Strouven’s base case for gold prices, implying another 10% rise. Gold expected upside: 10% - Base-case increase from current levels by year-end 2026. Fed cuts expected: 2 cuts - Gold outlook assumes additional Fed easing reduces gold’s opportunity cost. US investor gold allocation: less than 0.2% of portfolios - Used to argue investors are underallocated to gold and there may be room for more inflows. Portfolio gold sensitivity: 1.4% additional upside per 1 basis point increase in portfolio share - Goldman estimated the effect of rising investor allocation to gold. Oil price direction in 2026: trend lower - Base case is continued downside before recovery begins in 2027. Prior oil downside in 2025: roughly 15% - Context for expecting additional downside in 2026. U.S. power-demand trend: outpacing GDP growth for the first time since the 1970s - Don Strouven cited data-center-driven electricity demand as a major AI-related commodity theme. U.S. data-center concentration: 72% in 1% of counties - Used to show how localized power tightness is becoming in data-center markets. Risk appetite indicator: 0.8 - Christian Mueller-Glissman said investor sentiment is bullish and near the upper end of its range. US 10-year yield forecast: around 4.20% - Kamakshia Trivedi’s expectation for U.S. bond yields to remain range-bound. German bond yield forecast: towards 3.25% - Expected to rise on fiscal impulse. Corporate spreads percentile: first or second percentile - Illustrates how tight credit spreads are relative to history.

Pivotal Quotes: "that setup would generally be pretty good for risk assets like equities" — Peter Oppenheimer: Explaining why growth, moderating inflation, and lower rates should support equities in 2026. "our view is that the best commodity AI trade is local U.S. power markets" — Don Strouven: Describing where AI-linked commodity opportunities may be strongest. "you want to stay invested and manage the risk of an equity bear market as you already are entering that equity bear market" — Christian Mueller-Glissman: Arguing for remaining invested while using diversification and hedges to manage late-cycle risk.

Implications: For investors, the message is to stay pro-risk but not complacent: favor diversified equity exposure, selective EM/Asia and AI-adjacent opportunities, gold, and some bond duration, while being cautious on credit and using hedges against late-cycle volatility.