Goldman Sachs sets out a 2026 global credit sector allocation framework: yields support returns, but sector divergence will decide performance
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Goldman Sachs sets out a 2026 global credit sector allocation framework: yields support returns, but sector divergence will decide performance
The report forecasts 2026 total returns of 5.1%/6.1% for USD IG/HY and 1.8%/1.5% for EUR IG/HY, and recommends overweighting banks, insurance, energy, and aerospace & defense, while underweighting autos, REITs, and food & beverage.
- Spreads are expected to widen modestly, but high all-in yields should offset part of the pressure, keeping 2026 total returns in the middle of the historical range.
- The energy shock causes cyclical sectors to underperform defensive ones; Europe faces greater pressure because of its higher dependence on energy imports, and dispersion in EUR markets rises.
- Sector preferences are concentrated in financials, heavy-asset sectors with low technology-obsolescence risk, and commodity- and defense-related sectors.
- Underweight sectors include industries with high energy-input intensity, rising leverage, or valuation/concentration risk, such as autos, REITs, food & beverage, and consumer products/retail.
- The report emphasizes that large debt capital structures are changing the way sector fundamentals should be viewed, and that mean- or market-cap-weighted metrics are more informative than simple medians for capturing the impact of large companies.
Report interpretation
Overview
This report updates Goldman Sachs' 2026 total return and excess return forecasts for USD and EUR corporate credit markets and introduces a cross-market sector allocation framework. The core view is that the post-geopolitical and commodity-volatility mix of growth, inflation, and monetary policy is more challenging; spreads may widen modestly, but currently elevated yields still provide a return buffer for corporate credit. As a result, 2026 index-level alpha potential is limited, and investment returns will depend more on sector selection, credit selection, and capital structure selection.
Core views
Goldman Sachs expects 2026 full-year total returns of 5.1% and 6.1% for USD IG and USD HY, respectively, and 1.8% and 1.5% for EUR IG and EUR HY, respectively. Expected excess returns are 0.0% and +1.3% for USD IG/HY, and 0.0% and -0.4% for EUR IG/HY. At the sector level, the report favors financials, heavy-asset sectors with low technology-obsolescence risk, and commodity- and defense-related sectors, while underweighting energy-input-intensive industries. Regional differences are driven mainly by valuation, exposure to the energy shock, and issuer concentration risk.
Analysis framework
The report combines spread forecasts, the rates team's Treasury and Bund yield forecasts, historical return distributions, relative sector performance, spread and return dispersion, issuance and default migration dashboards, and sector-level net leverage trends to form allocation views across USD/EUR and IG/HY markets. It specifically compares median net leverage with market-cap-weighted net leverage to identify the non-linear impact of large debt issuers on sector fundamentals.
Methodology notes
Form overweight, underweight, and neutral views by region, rating bucket, and industry sector.
The framework integrates valuation, risk appetite, technical factors, net leverage trends, energy shock exposure, technology-obsolescence risk, and issuer concentration to assess relative allocation in USD and EUR credit markets.
Combine the spread outlook with the rates team's yield forecasts to estimate full-year total return and excess return.
The report offsets a modestly widening spread path against still-elevated all-in yields, and concludes that 2026 corporate credit total returns should sit roughly in the middle of the historical range.
Compare how typical issuers and large-scale debt issuers affect sector leverage differently.
In sectors such as Software, Tech Hardware, and Metals & Mining, deleveraging among median issuers may mask the impact of capital spending or rising leverage among large companies on market-cap-weighted metrics.
Measure dispersion using the decile range of bond index constituents.
The report notes that after the energy shock, dispersion in EUR IG rebounded from very low levels, while HY dispersion remains elevated, underscoring the importance of sector selection.
Asset mapping & comparison
Structured mapping from thesis to named assets (strengths, weaknesses, peers, risks).
- USD IGOne of the core allocation markets
- Strengths
- High all-in yields support full-year returns, with 2026 total return forecast at 5.1%; relative to Europe, the market is supported more by energy self-sufficiency and a potentially more dovish Fed reaction function.
- Weaknesses
- Spreads may still widen modestly, and 1Q2026 performance was weak.
- Comparison
- Compared with EUR IG, the report's allocation backdrop is more positive for USD IG.
- Risks
- Slowing growth, higher rates, and broader sector dispersion.
- USD HYYield-enhancement credit asset
- Strengths
- Expected 2026 total return is 6.1%, with +1.3% excess return, making it one of the stronger return forecasts among the four main credit buckets.
- Weaknesses
- 1Q2026 was the weakest total-return quarter for HY since 3Q2022, and dispersion still needs to be watched.
- Comparison
- Compared with EUR HY, USD HY has a higher return forecast and better excess return.
- Risks
- Rising defaults, spread widening, and funding pressure on lower-quality issuers.
- EUR IGEuropean investment-grade credit market
- Strengths
- Post-selloff yields have improved support, and a range-bound Bund yield assumption helps stabilize total returns.
- Weaknesses
- The energy shock and a more hawkish central bank reaction function make Europe more vulnerable, with expected total return of only 1.8%.
- Comparison
- Weaker than USD IG, with dispersion rebounding from low levels.
- Risks
- Energy prices, stagflation pressure, slower growth, and ECB policy constraints.
- EUR HYEuropean high-yield credit market
- Strengths
- Yields provide some cushion, and dispersion across sectors creates selective opportunities.
- Weaknesses
- Expected total return of 1.5% and excess return of -0.4% make it one of the weaker major credit buckets.
- Comparison
- Weaker than USD HY, with more pronounced energy shock and macro pressure.
- Risks
- Default rates, liquidity, energy-input costs, and macro downside.
- BanksOverweight
- Strengths
- Still attractive in a slowing but non-recessionary growth backdrop; the report prefers higher quality, and within USD favors Money Centers.
- Weaknesses
- Some capital structures already look tight; AT1 requires careful selection.
- Comparison
- Compared with lower-quality banks and regional banks, the preference is for higher quality and more senior parts of the capital structure.
- Risks
- Reset risk, call economics, macro deterioration, and changes in financial regulation.
- InsuranceOverweight
- Strengths
- One of the report's main overweight sectors, supported by the preference for financials.
- Weaknesses
- Valuation and rate sensitivity need to be watched.
- Comparison
- Preferred relative to energy-input-intensive industries.
- Risks
- Interest-rate volatility, asset-liability duration mismatch, and losses on credit investment portfolios.
- EnergyOverweight
- Strengths
- Both North America and Europe still show net leverage at historically low levels, and the fundamental screen is relatively solid.
- Weaknesses
- Net leverage has been rising gradually since 2022, which could limit further outperformance over time.
- Comparison
- Favored over consumer products/retail and other sectors with rising leverage and a more negative view.
- Risks
- Lower commodity prices, higher capex, and continued leverage increases.
- Aerospace & DefenseOverweight
- Strengths
- Supported by defense-related themes and by preference for heavy-asset, low-tech-obsolescence-risk sectors.
- Weaknesses
- Could be constrained by valuation and supply chain issues.
- Comparison
- Preferred relative to sectors with higher technological obsolescence risk or more energy-intensive exposure.
- Risks
- Budget cycles, execution risk, and valuation pullbacks.
- AutomotiveUnderweight
- Strengths
- Some issuers may have brand and scale advantages.
- Weaknesses
- Higher energy-input exposure, cyclicality, and technology-transition pressure.
- Comparison
- Weaker than financials, energy, and defense-related sectors.
- Risks
- Slowing demand, electrification transition costs, funding costs, and supply chain volatility.
- REITsUnderweight
- Strengths
- Some assets have stable rental cash flows.
- Weaknesses
- Sensitive to rates and financing conditions, and flagged as a key underweight.
- Comparison
- Weaker than financials and commodity-related sectors in the current high-rate environment.
- Risks
- Refinancing costs, asset valuation downgrades, and rising vacancy rates.
- Food & BeverageUnderweight
- Strengths
- Relatively defensive.
- Weaknesses
- The report flags it as a key underweight, which may reflect energy-input costs, valuation, or fundamental pressure.
- Comparison
- Less attractive than Banks, Insurance, Energy, and Aerospace & Defense.
- Risks
- Input costs, demand elasticity, and margin compression.
- Technology / Software / Tech HardwareBroadly neutral or selective
- Strengths
- Median issuers in North American IG show a deleveraging trend.
- Weaknesses
- AI capex pushes market-cap-weighted net leverage higher, and median metrics may understate the impact of large companies.
- Comparison
- The report is broadly neutral on Technology, unlike Energy or Financials, where it is explicitly overweight.
- Risks
- AI investment cycles, technology-obsolescence risk, capex expansion, and valuation volatility.
Key data
- USD IG 2026 total return forecast5.1%Around the median of the historical distribution over roughly the past 35 years.
- USD HY 2026 total return forecast6.1%After year-to-date performance came under pressure, the high yield offered by the market should help offset part of the losses.
- EUR IG 2026 total return forecast1.8%Slightly below the historical median.
- EUR HY 2026 total return forecast1.5%Europe faces more pronounced energy and macro pressure.
- USD IG / USD HY year-to-date total return-0.4% / -0.1%As of the period covered by the report, 1Q2026 was the weakest quarter for HY since 3Q2022.
- USD IG / USD HY 2026 excess return forecast0.0% / +1.3%Expected to recover from negative readings at the start of the year to flat or slightly positive.
- EUR IG / EUR HY 2026 excess return forecast0.0% / -0.4%Slightly below the historical median.
- US 10-year Treasury 2026 year-end forecast4.10%Assumes the Goldman rates strategy team's year-end 2026 forecast used in the total return model.
- EUR relative to USD spread performanceIG about 8bp behind, HY about 26bp behindSince February 27, the direction is consistent with the view that the energy-driven shock is more negative for Europe.
- EUR IG sector dispersionRecovered from the 3rd percentile to the 19th percentileShows that the market is beginning to distinguish industries with direct exposure to energy input costs.
- HY sector dispersion59th percentile for EUR, 39th percentile for USDHY still reflects macro, energy, and idiosyncratic risk at the same time.
Impact & implications
The investment implication of the report is that 2026 corporate credit should not rely solely on index-level spread tightening or beta returns. Yields provide some cushion, but excess return potential is limited. More important is selection across USD and EUR, IG and HY, different sectors, and capital structures. The USD market is relatively more favorable because of its larger weight in commodity- and defense-related sectors and stronger energy self-sufficiency, while the EUR market is more affected by energy-input costs, the central bank reaction function, and slower growth.
Risks
- Geopolitical developments and commodity price volatility continue to raise energy costs, especially for Europe, where the credit market is more adversely affected.
- A deterioration in the growth, inflation, and monetary policy mix causes spreads to widen more than forecast.
- Higher rates weaken total returns and increase refinancing pressure for REITs, HY, and highly levered issuers.
- Sector dispersion widens, and if allocation is wrong, median index returns may not translate into portfolio returns.
- Capex or leverage changes at large debt issuers may distort sector fundamentals, creating a risk of misreading the data if one looks only at median metrics.
- AT1 and bank capital instruments carry reset risk, call economics risk, and capital structure selection risk.
- European HY and energy-input-intensive sectors face pressure from defaults, liquidity, and profitability.
What to watch
- Whether USD and EUR IG/HY spreads widen modestly around midyear and then ease in the second half, as the report expects.
- Whether the US 10-year Treasury approaches the 4.10% year-end 2026 rate assumption.
- Whether dispersion in EUR IG and EUR HY continues to rise, especially among energy-input-intensive industries.
- Relative value across Money Centers, Regionals, Yankee banks, and AT1 within Banks.
- Whether Energy net leverage keeps rising from low levels and weakens the overweight case.
- Whether Consumer Products/Retail net leverage continues to deteriorate, confirming the underweight view.
- The persistent impact of AI capex on market-cap-weighted net leverage in Software and Tech Hardware.
- Default rates, rating migration, net issuance, maturity walls, and secondary-market liquidity.