Rising energy prices and the unwind in momentum trades jointly weigh on global equities

Overview

This edition of Global Weekly Kick-off focuses on the pressure on global equities amid rising energy prices and fading momentum. The report records an approximately 2% decline in global equities last week, with the technology sector down about 5%, while major Asian markets were hit more noticeably. Meanwhile, Middle East developments pushed Brent oil prices higher, allowing energy and defensive sectors to outperform on a relative basis. The report also discusses the rebalancing issue after the 'world portfolio' became concentrated in the U.S., equities, and technology over the past three years, and recommends that investors, rather than fully exiting, use multi-asset strategies to balance innovation, inflation, and risk control.

Core views

The core views are: first, short-term market pressure mainly comes from the unwinding of momentum trades, the pullback in tech stocks, and volatility in Asian markets; second, higher energy prices provide relative support for energy and defensive sectors; third, the earnings pressure caused by AI capital expenditure may weigh on returns for large-cap tech stocks before the benefits of AI applications are realized; fourth, long-term asset allocation should not simply chase the strong-performing assets of the past three years, but should reduce concentrated exposure to equities and technology through rebalancing while increasing the weight of real assets; fifth, being completely underweight risk assets may be costly in the short term, so a more reasonable approach is to retain innovation exposure while strengthening inflation protection and risk mitigation.

Analysis framework

The report uses a multidimensional framework for weekly tracking across global equities, regional markets, industry sectors, style factors, valuations, earnings revisions, fund flows, volatility, cross-asset correlations among equities, bonds, FX, and commodities, as well as Goldman Sachs macro forecasts. Its analysis primarily uses MSCI indices, regional local indices, EPFR fund flows, the GS Bull/Bear Market Indicator, the Risk Appetite Indicator, EPS revisions, and 12-month forward valuations as inputs.

Methodology notes

• Market Risk IndicatorsGS Bull/Bear Market Indicator

  Composite Bull/Bear Market Indicator

  This indicator uses the percentiles of multiple macro and market variables to characterize market-cycle risk. The report gives a composite percentile of 67%, with Shiller PE at the 98th percentile, indicating elevated valuations.

• Risk Appetite IndicatorRisk Appetite Indicator

  Cross-Asset Risk Appetite Tracking

  The RAI is constructed using z-scores of the relative performance of 27 cross-asset paired trades versus the past two years, and is used to observe changes in market risk appetite.

• Earnings AnalysisEPS revisions and earnings sentiment

  Earnings Revisions and Earnings Sentiment

  The report tracks marginal changes in regional and sector fundamental expectations through 2026 EPS revisions, 3-month EPS revisions, and earnings sentiment indicators.

• Valuation AnalysisForward P/E and equity risk premium

  Forward P/E and Implied Equity Risk Premium

  The report compares 12-month and 24-month forward P/E ratios for MSCI AC World, regional, sector, and style indices, and evaluates valuation attractiveness in conjunction with the implied ERP of global markets.

• Fund Flow AnalysisEPFR equity fund flows

  Global Equity Fund Flows

  The report uses EPFR country flow data to compare monthly and cumulative inflows between developed and emerging markets, and between active and passive funds.

Asset mapping & comparison

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

• Global Equities

  Core covered asset

  Strengths

  Goldman Sachs' 12-month forecast still shows positive return potential for major equity indices, with upside targets for the S&P 500, Topix, and MSCI Asia-Pacific Ex-Japan.

  Weaknesses

  Global equities fell about 2% last week, the momentum style pullback intensified, and high technology weights made indices more sensitive to a few mega-cap stocks.

  Comparison

  Asia ex-Japan has higher forecast upside than the U.S., Europe, and Japan, but its recent declines have also been more pronounced; Europe is relatively more resilient in the short term.

  Risks

  Further unwinding of momentum trades, technology earnings dragged by AI capital expenditure, higher oil prices suppressing risk appetite, and elevated valuation percentiles.

• Technology and Momentum Style

  Main source of pressure

  Strengths

  They still represent innovation exposure and may benefit over the long term from the diffusion of AI applications.

  Weaknesses

  The technology sector fell about 5% last week, momentum selling intensified, and AI capital expenditure may first depress the earnings power of large-cap tech stocks.

  Comparison

  Compared with energy and defensive sectors, technology and momentum styles performed more weakly in this week's market.

  Risks

  Delayed earnings realization, capital expenditure returns falling short of expectations, valuation compression, and crowded positioning.

• Energy and Real Assets

  Source of inflation protection and relative outperformance

  Strengths

  Tensions in the Middle East pushed Brent oil prices higher, and the energy sector performed relatively strongly last week; the rebalanced portfolio currently points to a higher allocation to real assets.

  Weaknesses

  Goldman Sachs' table forecasts Brent 12 months out below the current level, indicating oil prices may retreat over the medium term.

  Comparison

  Energy is more resilient than technology and momentum styles in the short term, but commodity prices are more sensitive to volatility and geopolitical events.

  Risks

  Falling oil prices, easing geopolitical risks, weaker demand, or supply changes causing a reversal in energy's relative returns.

• Defensive Sectors

  Short-term safe-haven beneficiary asset

  Strengths

  The report notes that energy and other defensive sectors outperformed in an environment of rising oil prices and falling risk appetite.

  Weaknesses

  If market risk appetite recovers quickly, defensive sectors may lag on a relative basis.

  Comparison

  Compared with cyclical and momentum assets, defensive sectors are better suited to the current phase of rising volatility.

  Risks

  Higher interest rates, expensive valuations, or macro data that again support cyclical assets.

• Asia ex-Japan Equities

  High forecast upside but high-volatility region

  Strengths

  The 12-month target for MSCI Asia-Pacific Ex-Japan implies 28.6% upside, the highest among the major equity indices in the table.

  Weaknesses

  Asian markets posted significant declines last week, with especially large drops in Taiwan and Korea.

  Comparison

  Upside is higher than for the S&P 500, STOXX Europe 600, and Topix, but short-term volatility is also stronger.

  Risks

  A correction in the technology supply chain, weaker export data, policy meetings disappointing expectations, and a decline in global risk appetite.

Key data

• Global equities performance last weekabout -2%The report says global equities fell about 2% last week, with momentum selling intensifying.
• Technology sector performance last weekabout -5%The technology sector led the decline and was an important source of pressure on global equities.
• Major Asian markets performance last weekJapan about -3%, Taiwan about -6%, Korea about -9%The report notes that Asian markets were hit significantly.
• Brent crude oilback above $90/bbl; the current value in the table is $88.1/bblTensions in the Middle East pushed oil prices higher, helping the energy sector outperform relatively; the table shows a 12-month forecast of $75/bbl, implying -14.9% upside versus the current level.
• S&P 500 forecastcurrent 7458, 12-month target 8300, upside 11.3%From Goldman Sachs' 3-month, 6-month, and 12-month macro forecast table.
• STOXX Europe 600 forecastcurrent 642, 12-month target 660, upside 2.9%The European market is relatively more resilient, but its target upside is lower than that of the U.S. and Asia ex-Japan.
• MSCI Asia-Pacific Ex-Japan forecastcurrent 840, 12-month target 1080, upside 28.6%In the forecast table, this regional equity index has the highest 12-month upside.
• Topix forecastcurrent 3919, 12-month target 4400, upside 12.3%The Japanese market was under pressure last week, but the 12-month forecast still implies positive return potential.
• U.S. 10-year yield forecastcurrent 4.5%, 12-month forecast 4.3%The table shows a 12-month change of -26 bp.
• Gold forecastcurrent $4006/oz, 12-month forecast $5115/oz, upside 27.7%Gold shows relatively high forecast upside within the multi-asset framework.
• Global GDP growth forecastGS forecast 2.5% for 2026, GS forecast 2.8% for 2027The table shows global consensus at 2.8% for 2026 and 2.5% for 2027.
• China GDP growth forecast4.6% for 2026, 4.7% for 2027Goldman Sachs' 2026 forecast matches consensus at 4.6%; its 2027 forecast is above consensus of 4.4%.
• GS Bull/Bear Market Indicator67th percentileThe indicator shows market risk at a moderately high percentile, with Shiller PE at 40.2 and the 98th percentile.

Impact & implications

For portfolios, the implication of this report is that in the short term one should neither ignore the drawdown risk from crowded positioning in technology and momentum styles, nor become overly concentrated in a single equity style when oil prices and inflation risks are rising. Goldman Sachs places greater emphasis on preserving innovation exposure through rebalancing and multi-asset allocation, while increasing the role of real assets, defensive assets, and risk-mitigation tools. Regionally, Asia ex-Japan offers higher 12-month forecast upside but also greater near-term volatility; Europe is relatively more resilient but has limited upside; the U.S. still has forecast positive returns, but valuations and technology concentration are the main constraints.

Risks

• Momentum trades continue to deleverage, putting further pressure on technology and high-beta assets.
• AI capital expenditure is incurred before revenue and profit realization, weighing on the earnings power of large-cap technology stocks.
• Tensions in the Middle East push oil prices higher, increasing inflation pressure and suppressing risk appetite.
• Global equity valuations are in elevated percentiles, with Shiller PE at the 98th percentile and limited margin of safety.
• Asian markets have seen large recent declines; if risk appetite continues to fall, regional volatility may amplify.
• If investors underweight equities too early or too aggressively, they may miss a rebound in risk assets in the short term.

What to watch

• U.S. new home sales data and the Fed blackout period ahead of the July FOMC meeting.
• The ECB policy rate decision, as well as flash PMI readings for the euro area, Germany, France, and the UK.
• UK labor market, inflation, and retail sales data.
• Japan's June imports and exports, trade balance, and nationwide new core CPI.
• China's July Politburo meeting, Korea's 20-day exports, Singapore's June CPI, Taiwan's June industrial production, and the Indonesia central bank meeting.
• Whether Brent oil can stay above $90/bbl, and whether the relative outperformance of the energy sector can continue.
• Whether the pullback in the technology sector and momentum factor spreads to the broader market.
• Follow-up changes in EPS revisions, earnings sentiment, EPFR fund flows, and risk appetite indicators.