Market Seeks Balance Between Micro Tailwinds and Macro Headwinds

Overview

This report explores the dynamic balance between micro tailwinds and macro headwinds in the current market environment. Although geopolitical risks from the Middle East war and rising energy prices constitute macro headwinds, the micro tailwind from the AI capital expenditure boom has pushed global stock markets near historical highs. The report notes that the current Risk Appetite Indicator (RAI) has risen above 1.2, the highest level since 2021, with market sentiment and positions becoming increasingly bullish. Based on this, Goldman Sachs maintains a moderately risk-preferential view over 12 months (overweight equities, underweight credit) but recommends short-term risk mitigation strategies.

Core views

The report's core views revolve around several aspects: First, the AI capital expenditure boom significantly drives earnings growth, particularly for global tech hardware stocks, leading to highly concentrated gains. The US strategy team raised EPS for AI infrastructure companies by over 40% for the next 12 months, and the S&P 500 2026 earnings growth forecast was raised to 24%. However, this rally dominated by a few companies increases market vulnerability. Second, the macro backdrop has shifted from the first quarter's 'Goldilocks' to a more reflationary high nominal growth environment. The energy price shock pushed inflation scores back into positive territory, reducing the prospects for policy easing. Although economic growth is more resilient due to lower-than-expected oil price increases, continued closure of the Hormuz Strait will increase drag on global growth. Third, risk appetite and positioning indicators show markets are increasingly bullish, but such high RAI levels do not necessarily signal a bearish outlook. Historical data show that from RAI levels above 0.9, the likelihood of extreme positive and negative returns is lower, but the frequency of minor corrections increases. Downside risks would rise if macro surprises turn negative. Finally, the report details the outlook for various asset classes: For equities, future returns are expected to slow but remain positive, mainly driven by earnings growth; for bonds, yields are expected to decline slightly, but valuations do not support significant gains; for credit, spread narrowing limits upside potential; for commodities, prices are expected to decline, but high roll yields provide support.

Analysis framework

Goldman Sachs' analytical framework adopts a multi-dimensional macro-micro integration approach. First, it assesses market sentiment and positions through the Risk Appetite Indicator (RAI) and its components (global growth, monetary policy, US dollar). Second, it uses a scenario analysis framework, categorizing market states into 'Goldilocks', 'Reflation', 'Balanced Bear', etc., to analyze the potential impact of various factors on asset performance. Additionally, the report employs valuation analysis, comparing current valuation levels with historical and macro-implied levels, particularly using Shiller PE and profitability (ROE) to assess equity risk premiums. For risk control, the report recommends option strategies (such as call spread collars and long-term call options) and factor diversification to manage portfolio risks in the current high-volatility environment.

Methodology notes

• Cycle and Sentiment FrameworkSentiment Inflection Analysis

  Market Scenario Analysis (Goldilocks/Reflation/Balanced Bear)

  The report uses a scenario framework to classify market states, analyzing the performance characteristics of asset classes under different macro environments, helping investors understand the current market position and potential turning points.

• Event Game Theory and Behavioral FinanceExpectation Gap/Expectation Management

  Risk Appetite Indicator (RAI) as a Market Sentiment Measure

  RAI measures market risk appetite by synthesizing growth, policy, and currency factors; the report uses it to judge over-optimistic or pessimistic market states, guiding short-term tactical adjustments.

• Valuation methodsPE/PEG valuation

  Shiller PE Comparison with Macro-Implied Valuation

  By comparing current Shiller PE with macro-implied valuation based on inflation and profitability (ROE), it assesses the reasonableness of stock valuations and potential risks.

• Quantitative/Factor/Portfolio TheoryBeta/alpha analysis

  Index Concentration and Risks of Few Stocks Dominating

  The report points out that a few tech stocks dominate index gains, leading to increased market concentration, which raises portfolio volatility and drawdown risks.

Key data

• Risk Appetite Indicator (RAI)1.2+Highest level since 2021
• AI Infrastructure Companies EPS Increase>40%Year-to-date (YTD) growth
• S&P 500 2026 Earnings Growth Forecast24%Raised due to AI capital expenditure
• Asia Strategy Team Raised South Korea 2026 Earnings Growth320%Mainly driven by tech hardware
• US 10-Year Yield Target4.1%2026 year-end forecast

Impact & implications

The report believes the current market is in a tug-of-war between micro tailwinds and macro headwinds. AI capital expenditure continues to support corporate earnings, especially for tech hardware and semiconductor companies, but geopolitical tensions and energy price volatility pressure growth and monetary policy. This environment implies asset prices may remain highly volatile, equity-bond correlations may turn positive, increasing drawdown risks for traditional 60/40 portfolios. Investors need to balance innovation dividends with inflation risks, considering adding real assets to portfolios to hedge uncertainty. In the short term, any renewed closure of the Hormuz Strait could push up oil prices and yields, suppressing risk asset performance.

Risks

• Continued closure of the Hormuz Strait leading to upward pressure on oil prices and yields
• Inflation stickiness higher than expected, central bank policies more hawkish
• Correction risk from overly optimistic market sentiment
• Escalation of geopolitical tensions
• Slowdown in AI investment boom or earnings falling short of expectations

What to watch

• Progress on Hormuz Strait reopening
• Global inflation data and central bank policy signals
• AI-related company earnings and capital expenditure trends
• Changes in the Risk Appetite Indicator (RAI)
• Trends in equity-bond correlation