Will US Stocks Outperform in 2026?

Episode Summary

Executive Summary: Goldman Sachs’ 2026 outlook argues for staying invested, with a continued overweight to U.S. assets but meaningful diversification into non-U.S. developed and especially emerging markets ex-China. The team sees earnings, not valuations, as the key long-term driver, is skeptical of China’s reported growth and equity sustainability, and views AI, gold, and private-market hype as overstated relative to fundamentals.

Main Topics: U.S. exceptionalism and portfolio positioning (Priority: 5/5): The discussion reaffirms Goldman’s long-term belief in U.S. preeminence: the U.S. should remain overweight in portfolios, but not to the exclusion of non-U.S. and emerging market exposure. 2025 market performance versus earnings (Priority: 5/5): U.S. stocks posted strong gains but lagged global peers on returns, while U.S. earnings growth was far healthier than non-U.S. developed markets and China, reinforcing the firm’s earnings-led framework. 2026 return outlook across regions (Priority: 4/5): For 2026, Goldman expects non-U.S. developed markets to lag, the U.S. to be mid-pack, and emerging markets ex-China to outperform modestly, with only small differences in expected returns. China growth skepticism and asset caution (Priority: 5/5): The conversation questions the reliability of official Chinese growth data and argues that slowing long-term trend growth limits enthusiasm for Chinese equities despite recent price strength. AI enthusiasm, concentration, and bubble risk (Priority: 4/5): Goldman sees U.S. equities as broadly not in bubble territory, but believes the AI ecosystem—especially in private markets—contains excessive hype, optimistic productivity assumptions, and easy financing. Gold, Bitcoin, and the role of diversification (Priority: 4/5): The firm reiterates that gold and Bitcoin are not preferred strategic hedges; instead, U.S. Treasuries are the most reliable portfolio hedge, with private assets used cautiously. Long-term valuation and return expectations (Priority: 4/5): The team disputes simple mean-reversion narratives for valuations, arguing that stable GDP, strong margins, and fair value versus bond yields support reasonable long-term equity returns around 6% rather than a collapse in returns.

Key Arguments: U.S. preeminence remains intact, so portfolios should still be overweight U.S. assets, but clients should keep some non-U.S. exposure for diversification. Staying invested through volatility was rewarded in 2025; when markets sold off, Goldman advised deploying cash and rebalancing rather than sitting out. Earnings matter more than price action: U.S. equity gains were supported by 12% earnings growth, while non-U.S. developed markets rose on only 2% earnings growth and China’s earnings fell. The 2025 outperformance of China and non-U.S. developed equities looks unsustainable because prices diverged sharply from fundamentals. For 2026, expected regional returns are fairly close, but Goldman still sees the strongest earnings backdrop in the U.S. and prefers emerging markets ex-China over China. China’s official growth figures appear overstated relative to alternative estimates, and long-term growth is expected to slow toward 2%, reducing equity appeal. AI may be transformative over time, but short-term productivity claims are being oversold, particularly in private markets where vendor financing and easy credit resemble bubble-like behavior. The S&P 500 remains hard to beat; broad market-cap exposure is preferred over concentrated bets on the Magnificent 7. Gold is not a strategic hedge because it does not produce cash flow and has not reliably protected against inflation; U.S. Treasuries are better for deflation protection. High valuations alone do not predict weak future returns; lower GDP volatility, stronger margins, and fair value relative to bonds support continued decent long-term equity returns.

Data Points: U.S. equity return in 2025: 18% - U.S. stocks rose strongly but underperformed several global peers. Base-case U.S. equity return estimate for 2025: 6% - Goldman’s forecast was well below actual performance. Upside U.S. equity return scenario for 2025: 14% - A 30% probability scenario that still undershot realized returns. Non-U.S. developed equity return in 2025: 22% - Developed international markets outperformed U.S. equities. China equity return in 2025: 33% - Chinese equities surged despite weakening earnings. U.S. earnings growth in 2025: 12% - Strong earnings helped justify U.S. market gains. Non-U.S. developed earnings growth in 2025: 2% - Prices rose far more than fundamentals in developed ex-U.S. markets. China earnings growth in 2025: Negative - Chinese equity gains occurred despite falling earnings. 2026 base-case return: non-U.S. developed: 6% - Goldman expects lagging performance for developed markets outside the U.S. 2026 base-case return: U.S.: 7% - The U.S. is expected to be in the middle of the pack. 2026 base-case return: emerging markets: 8% - Emerging markets, especially ex-China, are expected to outperform modestly. China 2025 official GDP growth: Around 4.8%-5% - Used as the official range discussed on the program. Alternative estimate of China 2025 GDP growth (Rhodium Group): 2.5%-3% - Presented as a more skeptical outside estimate. Alternative estimate of China 2025 GDP growth (Jonathan Anderson): Around 1% mid-2025 - Another external estimate cited as much lower than official figures. China long-term base-case growth: 3% - Goldman’s base case for China’s next decade. China 2035 GDP growth: About 2% - Projected slowdown in trend growth by 2035. U.S. trend growth by 2035 including AI: About 2.4% - Goldman’s economics team expects AI to add about 0.4% to U.S. GDP. Current U.S. trend growth: About 2% - Used as the starting point for the AI-enhanced long-term outlook. Emerging markets currency headwind contribution to returns: About 40% - Currency depreciation had been a significant drag on EM returns, expected to fade. AI productivity claim for physical childcare: 21% improvement - Example cited to illustrate hype and implausible short-term claims. AI productivity claim for overall care: 28% improvement - Cited as an example of over-optimistic AI estimates. S&P 500 return in 2025: 18% - Broad U.S. market delivered strong gains. S&P 500 return excluding Magnificent 7 in 2025: 15% - Shows breadth beneath the largest tech names. Recession time before 1992: 18%-19% of the time - Historical recession frequency used in the valuation discussion. Recession time now: 8% of the time - Lower GDP volatility supports higher multiples. Long-term inflation hedge rate for gold: About 50% - Gold’s inflation hedging reliability was contrasted with equities. Long-term inflation hedge rate for U.S. equities: 100% - Equities were described as a better long-run inflation hedge. Long-term U.S. equity return assumption: About 6% - Goldman’s expected U.S. equity return over the next five years.

Pivotal Quotes: "We believe that is still true. What does that imply for investments? An overweight to U.S. assets, but never totally at the expense of non-U.S. assets." — Charmeen Masavar Romani: On U.S. preeminence and the need for diversification. "At the end of the day, prices follow earnings." — Charmeen Masavar Romani: Explaining why U.S. equity outperformance remains preferred over the long run. "Fact from boosterism" — Allison Nathan: Introduced as a key challenge in assessing the AI ecosystem.

Implications: Investors should stay diversified, keep a U.S. core, and favor EM ex-China over China. Gold and AI hype are not substitutes for fundamentals; Treasury bonds remain the cleaner hedge, and long-term returns still look reasonable despite elevated valuations.