Global Equities Retreat Weekly as Cautious AI Sentiment and Middle East Risks Suppress Risk Appetite

Overview

This report reviews weekly global equity market performance, the macroeconomic data calendar, sector and style performance, earnings revisions, valuations, fund flows, developed-market and emerging-market comparisons, as well as volatility, skew, and dividend markets. The central backdrop is that global equities declined amid Middle East tensions and cautious AI-related narratives, with risk appetite weakening and technology and communication under pressure, while value, defensives, and some sectors supported by fund flows showed greater relative resilience.

Core views

The report’s core views are: first, global equities are under short-term pressure, with all major regions posting negative returns and Asia and emerging markets underperforming; second, cautious AI-related narratives have weighed on the technology sector, while momentum trading has also shown signs of reversal; third, defensive sectors and value styles tend to outperform relatively when risk appetite retreats; fourth, industry fund flows are consistent with Goldman Sachs’ “Post Modern Cycle” framework, under which future return contributions may come more from EPS growth and earnings revisions than from valuation expansion; fifth, even as moderating energy prices cool fund flows to energy and commodities, outflow sectors such as real estate, healthcare, and consumer goods continue to face a weaker earnings backdrop and may find it difficult to reverse their trends quickly.

Analysis framework

The report applies a cross-region, cross-sector, cross-style, and cross-asset weekly market-monitoring framework. It combines MSCI index performance, Goldman Sachs macro forecasts, the GS Bull/Bear Market Indicator, the Risk Appetite Indicator, EPS growth and revisions, forward P/E, ERP, EPFR fund flows, developed-market and emerging-market comparisons, and options-implied volatility, skew, and dividend-market data to form an integrated assessment.

Methodology notes

• Market risk indicatorsGS Bull/Bear Market Indicator

  Bull/bear market risk gauge

  This indicator measures cycle risk using the average percentile of multiple macroeconomic and market variables, helping assess whether the equity market is operating in a more bullish or bearish risk environment.

• Risk appetite indicatorsRisk Appetite Indicator

  Cross-asset risk appetite

  The RAI is based on 27 groups of cross-asset pair trades and uses the z-score of performance over the past two years to measure changes in risk appetite; this report notes that the indicator has declined, supporting a cautious short-term view.

• Investment cycle frameworkPost Modern Cycle

  Returns shifting from valuation to earnings growth

  Goldman Sachs believes that under this cycle framework, the composition of equity returns may shift further from valuation expansion toward EPS growth, making industry fund flows and earnings revisions more important assessment variables.

• Earnings analysisEPS growth and revisions

  Earnings growth and earnings revisions

  The report compares expected EPS growth for 2026 and 2027, earnings sentiment, and three-month and year-to-date EPS revisions to explain differences in sector and regional performance.

• Valuation analysisForward P/E and ERP

  Forward P/E and equity risk premium

  The report uses 12-month and 24-month forward P/E, valuation relative to historical ranges, and implied ERP for global markets to assess valuation pressure on markets and sectors.

• Fund flow analysisEPFR equity fund flows

  Global equity fund flows

  The report tracks monthly flows from global investors into developed-market and emerging-market equity funds, distinguishing active and passive flows to validate sector and regional allocation trends.

Asset mapping & comparison

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

• Global equities

  Core covered asset

  Strengths

  Long-term fund flows and earnings growth can still support some regions and sectors.

  Weaknesses

  Major regions all declined last week, with short-term risk appetite retreating.

  Comparison

  Asia and emerging markets performed more weakly than developed markets.

  Risks

  Middle East tensions, cooling AI narratives, weaker earnings revisions, and valuation pressure.

• Technology

  Key sector carrying AI-related narratives

  Strengths

  It has attracted substantial industry fund inflows over the past several years, while earnings growth remains an important driver.

  Weaknesses

  Cautious AI narratives have pressured short-term performance.

  Comparison

  The report states that technology was the weakest-performing sector after communication.

  Risks

  Cooling AI expectations, reversal in momentum trading, and declining valuation premiums.

• Value sectors

  Style that relatively benefits when risk appetite declines

  Strengths

  The report states that value sectors have relatively outperformed globally.

  Weaknesses

  If earnings growth is insufficient, low valuation alone may not sustainably drive returns.

  Comparison

  Performance has improved relative to Growth.

  Risks

  Slower economic growth or downward earnings revisions could weaken a rebound in value styles.

• Defensives

  Defensive allocation during periods of declining risk appetite

  Strengths

  The report states that defensive sectors have relatively outperformed globally.

  Weaknesses

  If risk appetite recovers rapidly, they may underperform high-beta and cyclical sectors.

  Comparison

  They have performed more strongly relative to Cyclicals.

  Risks

  Changes in interest rates, insufficient earnings resilience, and crowded valuations.

• Emerging Markets

  Regional allocation comparison

  Strengths

  Some emerging markets may still be supported by fund flows and valuation discounts.

  Weaknesses

  The report notes that emerging markets underperformed last week.

  Comparison

  They performed relatively weakly compared with Developed Markets.

  Risks

  Volatility in the dollar, commodity prices, global risk appetite, and local earnings revisions.

• Commodities-related equities

  Sector with recently strengthened fund-flow preference

  Strengths

  Recent fund flows have been more favorable toward commodity-related stocks.

  Weaknesses

  Fund flows to energy and commodities may slow as energy prices moderate.

  Comparison

  They have attracted stronger fund preferences than real estate, healthcare, and consumer-related funds.

  Risks

  Falling energy prices, slowing cyclical demand, and adjustments to earnings expectations.

Key data

• Weekly global equity performanceDown more than 2%The report states that global equities fell by more than 2% last week, with all major regions posting negative returns.
• Weaker-performing regionsAsia and emerging markets underperformedThe report notes in its market overview that Asia and Emerging Markets lagged.
• Technology sector performanceWeakest after communicationCautious AI-related narratives weighed on Technology, making it the weakest-performing sector after Communication.
• Risk appetiteRisk Appetite Indicator decliningThe report states that the risk appetite indicator retreated, consistent with the relative outperformance of defensive and value styles.
• Sectors receiving fund inflowsTechnology, Industrials, InfrastructureOver the past several years, global industry funds have mainly flowed into technology, industrials, and infrastructure, while preferences for commodity-related stocks have recently strengthened.
• Sectors experiencing fund outflowsReal Estate, Healthcare, and Consumer-related fundsThese sectors have continued to experience outflows and still face a weaker earnings backdrop.
• Pricing reference dateFriday, June 26 closeThe report states that market pricing is based on the Friday, June 26 close.
• Strong weekly local-index examplesDenmark KFX +3.5%, Brazil IBOV +2.9%, Switzerland SMI +2.9%From the global local equity-index performance table.
• Weak weekly local-index examplesSouth Korea KOSPI -7.1%, China (H) HSCEI -6.5%, HK HSI -5.2%, Indonesia JCI -4.5%From the global local equity-index performance table, showing significant pressure in parts of Asia.

Impact & implications

For portfolios, the report suggests reducing indiscriminate short-term exposure to high-beta assets, momentum, and overheated AI narratives, while monitoring whether earnings growth and earnings revisions can continue to support sector performance. Value and defensive styles may benefit relatively as risk appetite retreats, but medium-term sector allocation should continue to be guided by EPS growth, the sustainability of fund flows, and valuation constraints.

Risks

• A further escalation of Middle East tensions suppresses global risk assets.
• AI-related narratives continue to cool, weighing on technology and momentum assets.
• The Risk Appetite Indicator continues to decline, pressuring high-beta and cyclical styles.
• Earnings growth or earnings revisions fall short of expectations, weakening the main return drivers under the Post Modern Cycle.
• Moderating energy prices slow fund flows to commodity- and energy-related stocks.
• The earnings backdrop for outflow sectors such as real estate, healthcare, and consumer goods remains weak.

What to watch

• The U.S. employment report.
• Fed Chairman Kevin Warsh’s speech at the ECB Forum in Sintra, Portugal.
• Preliminary inflation data for the eurozone, Germany, France, Italy, and Spain.
• Japan June BOJ Tankan, May industrial production, and final data for the 2026 shunto spring wage agreement.
• June PMI data for AEJ, June CPI for Korea and Indonesia, Vietnam Q2 GDP, and May IP and June exports for South Korea.
• 2026 and 2027 EPS growth expectations and the direction of earnings revisions.
• Global equity fund flows, particularly funds related to Technology, Industrials, Infrastructure, Commodities, Real Estate, Healthcare, and Consumer sectors.
• Changes in implied volatility, three-month standardized skew, and the 2026 dividend market.