Cross-asset market repricing around higher rates and oil prices: Higher policy rates and oil prices drive a defensive near-term cross-asset repricing

Overview

This cross-asset GOAL Kickstart reviews how higher policy rates and oil prices reshaped market pricing. Goldman Sachs describes a more cautious near-term backdrop but retains a modestly pro-risk 12-month allocation view.

Core views

The immediate catalyst was a renewed rates-and-energy shock. The Fed and the Bank of Japan each raised policy rates by 25bp, taking Japanese policy rates to their highest level in more than 31 years, while the Bank of England left policy unchanged. Brent briefly rose back above $100/bbl amid supply disruptions, escalating warfare and refining constraints, although it moderated again on the day of publication. Goldman Sachs identifies front-end rates as the main driver of last week's cross-asset repricing: G4 front-end volatility rose ahead of the central-bank meetings, especially relative to equity volatility. The move was less pronounced at the long end because Treasury buybacks, a still-hawkish Bank of Japan path and the UK's gilt-friendly quantitative-tightening plan helped anchor long yields. The US 2s10s curve consequently reached its flattest level since March 2025. Risk appetite has weakened from its August peak. Goldman Sachs' Risk Appetite Indicator softened before a small rebound to 0.8 last week, while the gap between safe-asset and risky-asset components widened to its largest level since 2022 as nominal yields rose. Long-duration bonds, the US dollar and US investment-grade CDS indices recovered from the sell-off around the August risk-appetite peak. In contrast, non-US equities, value relative to growth, cyclicals relative to defensives, and the yen lagged. Global equities have modestly de-rated since the start of the month, including cyclically exposed sectors, which the report says have received little valuation support despite higher commodity prices. Credit has stayed broadly resilient, although Goldman Sachs' credit strategists see AI-related issuance as a larger headwind for cash than for synthetic credit. In Europe, higher TTF prices and a widening OAT-Bund spread point to simultaneous repricing of energy and sovereign risk premia. The tactical allocation message is cautious. Goldman Sachs is neutral across assets for three months and judges the tactical case for bonds relative to equities in balanced portfolios to be mixed despite the sharp year-to-date rise in global bond yields. For 12 months, it is modestly pro-risk: overweight equities and underweight bonds, commodities, cash and credit. Its forecast table places the S&P 500 at 7,651 currently, with targets of 8,000 in three months, 8,300 in six months and 8,700 in 12 months, implying respective total-return upside of 4.9%, 9.1% and 14.9%. In a rates-relief scenario, defined as a two-standard-deviation easing in the monetary-policy component of its Risk Appetite Indicator principal-component model, calls on emerging-market and corporate credit, bonds and real estate rank among the more attractive hedges. However, Goldman Sachs also expects material equity relief when both rates and oil prices fall. It highlights receiver swaptions on front-end rates as a more convex hedge against rising recession risk that could also benefit if energy prices decline. The report supports its allocation monitoring with relative valuation, yield, volatility, correlation, positioning and recession-risk indicators. In its cross-asset valuation table, current 12-month forward P/E ratios include 19.1x for the S&P 500, 14.1x for the Stoxx Europe 600, 10.4x for MSCI Asia-Pacific ex-Japan and 15.6x for the TOPIX. Government-bond yields are at the 100th percentile of their prior 10-year histories for the US, Germany, Japan and UK in the yield table, while credit yields remain elevated relative to their histories. The report also monitors market-implied US recession probabilities, equity drawdown and rally probabilities, fund flows, CFTC positioning, cross-asset correlations, implied and realized volatility, and FX forecasts as inputs to the evolving risk backdrop.

Analysis framework

Goldman Sachs combines recent policy and commodity developments with cross-asset indicators covering risk appetite, yields, valuations, flows, positioning, volatility, correlations and recession-risk models. It then compares asset behavior under a monetary-policy easing scenario and translates those results into three-month and 12-month allocation views.

Methodology notes

• Valuation methodsDDM (Dividend Discount Model)

  One-stage dividend discount model used to estimate equity risk premia.

  The report estimates equity risk premia using local 10-year yields and long-term GDP consensus assumptions, allowing comparison with credit spreads.

• Quantitative, Factor, and Portfolio TheoryMulti-factor model

  Risk Appetite Indicator principal-component analysis.

  The report separates cross-asset risk appetite into factors including a monetary-policy component, then estimates asset responses to a standardized move in that factor.

• Other

  Univariate and multivariate logit models for market-implied US recession risk and S&P 500 drawdown or rally probabilities.

  These statistical models convert market and macro inputs into probabilities for recession and large equity-market outcomes.

Asset mapping & comparison

Structured mapping from thesis to named assets (strengths, weaknesses, peers, risks).

• Equities

  Overweight over 12 months; expected to benefit materially if rates and oil prices decline.

  Strengths

  Goldman Sachs forecasts positive 12-month total returns for major equity indices.

  Weaknesses

  Global equities have modestly de-rated, and cyclicals have received little valuation support despite higher commodity prices.

  Comparison

  Preferred to bonds tactically only with a mixed near-term case for balanced portfolios.

  Risks

  Higher rates, elevated oil prices and weaker risk appetite.

• Government bonds

  Potential hedge in a rates-relief scenario; underweight in the 12-month allocation.

  Strengths

  Calls on bonds rank among attractive hedges if the monetary-policy factor eases.

  Weaknesses

  The tactical case versus equities is mixed after sharp year-to-date yield increases.

  Comparison

  More attractive relative to equities in a rates-relief environment.

  Risks

  Persistently elevated rates and uncertainty around long-end yield anchoring.

• Credit

  Broadly resilient, but underweight over 12 months.

  Strengths

  Credit held up better than equities during the recent repricing.

  Weaknesses

  AI-related issuance is expected to be a larger headwind for cash credit than synthetic credit.

  Comparison

  Calls on emerging-market and corporate credit are attractive in a rates-relief scenario.

  Risks

  Rising issuance and broader risk-off conditions.

• Real Estate

  Ranks among attractive hedges in a rates-relief scenario.

  Strengths

  Potentially benefits from lower rates.

  Comparison

  Included with credit and bonds among leading rates-relief hedges.

  Risks

  Higher nominal yields.

Key data

• Fed and Bank of Japan policy moves+25bp eachBoth central banks raised policy rates in the prior week.
• Brent crudeAbove $100/bblBriefly exceeded this level amid supply disruptions, warfare escalation and refining constraints before moderating.
• Risk Appetite Indicator0.8Small rebound last week after softening from its August peak.
• US 2s10s curveFlattest since March 2025Reflects front-end-led repricing.
• S&P 500 forecast8,000 / 8,300 / 8,700Goldman Sachs three-, six- and 12-month forecasts versus a current level of 7,651.
• WTI forecast$80 / $78 / $73 per barrelThree-, six- and 12-month forecasts versus a current spot price of $101/bbl.
• Gold forecast$4,650 / $4,810 / $5,140 per troy ozThree-, six- and 12-month forecasts versus a current price of $4,352.

Impact & implications

The report portrays higher rates and oil prices as near-term headwinds to risk appetite and cyclical equity valuations, while credit remains comparatively resilient. A simultaneous decline in rates and oil prices would provide the strongest relief to equities; bonds and rate options may offer useful hedges in a rates-relief or recession-risk scenario.

Risks

• Supply disruptions, escalating warfare and refining constraints could keep oil prices elevated.
• Rising energy and sovereign risks could continue to widen European risk premia.
• AI-related issuance could weigh more heavily on cash credit than synthetic credit.
• Further increases in recession risk would challenge risky assets.

What to watch

• US and euro-area PMIs.
• The US durable-goods report.
• The meeting between President Trump and Xi Jinping.
• The path of oil prices, front-end rate volatility and nominal yields.
• European TTF prices and the OAT-Bund spread.