Energy prices continue to rise, momentum unwinding dominates markets; Goldman maintains 3-month neutral and 12-month modestly pro-risk positioning

Overview

This is a Goldman Sachs GOAL Kickstart cross-asset strategy report focused on a market environment in which micro-level equity momentum unwinding is occurring alongside macro energy/rates shocks. The report notes that energy prices continue to rise, but US inflation pricing is constrained by hawkish Fed commentary and soft CPI; meanwhile, the Momentum factor linked to AI capex within the equity market continues to retrace. Goldman maintains a neutral stance over a 3-month horizon and a modestly pro-risk stance over a 12-month horizon, expressed primarily through an overweight in equities and an underweight in credit.

Core views

The report's core views are: first, energy prices and policy rate expectations are dominating the performance of macro assets such as bonds, FX, and gold; second, equity market performance is being driven more by the unwinding of the Momentum/AI capex factor than by front-end rates alone; third, rising cross-asset correlations are reducing the effectiveness of traditional diversification, but high dispersion within equities means that defensive/quality and real-asset equities such as Low Vol, Dividend Aristocrats, REITs, and Infrastructure can still provide portfolio balance; fourth, crowded long positioning and macro headwinds may weigh on risk-adjusted returns in the short term, but earnings growth is still expected to support equities in the second half of the year; fifth, Russell 2000, US Consumer Discretionary, US Banks, China equity, and S&P 500 puts can serve as hedges against growth shocks.

Analysis framework

The report uses a cross-asset framework, decomposing recent performance into equity momentum, front-end rates, energy prices, inflation pricing, risk appetite, fund flows, CFTC positioning, correlations, volatility, liquidity, recession probability, valuation, and earnings revisions, and combines these with GOAL asset allocation recommendations and 3-month, 6-month, and 12-month forecasts to reach its allocation conclusions.

Methodology notes

• Cross-asset allocationGOAL asset allocation recommendations

  3-month and 12-month allocation weights

  N, OW, and UW are used to indicate neutral, overweight, and underweight, respectively, to assess short-term tactical risk and 12-month expected returns.

• Risk appetiteGS Risk Appetite Indicator / PCA

  Risk appetite principal component analysis

  Tracks changes in cross-asset risk appetite through principal components such as global growth, monetary policy, and the US dollar factor.

• Valuation comparisonCross-asset valuation percentile

  10-year historical percentile

  Measures how expensive or cheap equity valuations, bond yields, credit spreads, and FX are relative to fair value based on the past 10 years of history.

• Recession and drawdown riskMarket-implied recession and S&P 500 drawdown logit models

  Market-implied probability model

  Uses market indicators to build logit models that estimate the probability of a US recession and the probability of a large drawdown or rally in the S&P 500 over the next 12 months.

Asset mapping & comparison

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

• Equities

  12m OW, 3m overall N; S&P 500, MSCI Asia-Pacific ex. JP, and Topix are OW, while Stoxx Europe 600 is UW

  Strengths

  Earnings growth is expected to support performance in the second half, and some regions and indices still have relatively high 12-month total return forecasts.

  Weaknesses

  Momentum/AI capex-related trades continue to unwind, and bullish positioning is somewhat crowded in the short term.

  Comparison

  Compared with credit, Goldman prefers equities more; within equities, it prefers defensive/quality and real-asset-related styles to reduce portfolio concentration.

  Risks

  Rising macro risks, growth shocks, further momentum unwinding, and rising correlations may create downside.

• Government Bonds

  Overall N; US 10-year is 3m OW and 12m OW, Germany 3m OW and 12m N, Japan UW, UK 12m OW

  Strengths

  Lower yield forecasts provide some total return potential, and macro assets are sensitive to policy rate expectations.

  Weaknesses

  Volatility in front-end rates and inflation pricing may still limit return stability.

  Comparison

  Bonds, together with FX and gold, are driven by rates, and their diversification effect depends on the nature of the rates shock.

  Risks

  Further rises in energy prices, more hawkish central banks, or a reacceleration in inflation would increase rate risk.

• Credit

  12m UW; some USD IG/HY are short-term OW, but credit is underweight overall

  Strengths

  USD IG/HY still have positive total return forecasts.

  Weaknesses

  Credit spreads are historically expensive, with insufficient risk compensation.

  Comparison

  The report explicitly places more 12-month risk preference in equities rather than credit.

  Risks

  Growth shocks, spread widening, and rising correlation between credit and equity volatility.

• Commodities

  Overall N; Gold 12m OW, Oil N

  Strengths

  Gold has high forecast upside in a rates and safe-haven environment; real-asset equities also provide portfolio diversification.

  Weaknesses

  The 12-month forecast prices for WTI and Brent are below current levels, implying negative spot return forecasts for oil.

  Comparison

  Gold is more attractive for allocation than oil products; rising energy prices are more of a macro risk source.

  Risks

  Middle East tensions, energy supply shocks, and changes in the US dollar and real rates.

• FX

  Used as a cross-asset macro observation dimension, with no unified OW/UW recommendation

  Strengths

  Some currency pairs such as AUD/USD have positive spot return forecasts.

  Weaknesses

  Forecast returns for EUR/USD and GBP/USD are somewhat negative.

  Comparison

  Like bonds and gold, FX is more driven by front-end rates and the US dollar factor.

  Risks

  US dollar factor, differences in central bank policy, and changes in global risk appetite.

• Cash

  N

  Strengths

  Short-end rates still provide stable returns, with US 3-month T-bill 12m total return around 4.00%.

  Weaknesses

  In a 12-month modestly pro-risk allocation, cash is not a primary overweight direction.

  Comparison

  Cash is used to maintain portfolio liquidity and defensiveness, but equities are the main expression of risk assets.

  Risks

  Changes in the rate-cut path will affect reinvestment income.

Key data

• Overall asset allocation3m N; 12m modestly pro-risk, OW equities, N cash/bonds/commodities, UW creditGoldman's tactical and 12-month asset allocation view explicitly stated in the main report text.
• S&P 500 forecastCurrent 7458; 3m 7600; 6m 8000; 12m 8300; 12m total return 12.5%From the GOAL forecast table in Exhibit 6.
• MSCI Asia-Pacific ex. JP forecastCurrent 840; 3m 980; 6m 1030; 12m 1080; 12m total return 28.6%The table shows this region as 3m OW and 12m OW.
• Topix forecastCurrent 3919; 3m 4100; 6m 4200; 12m 4400; 12m total return 14.5%The table shows Topix as 3m OW and 12m OW.
• Stoxx Europe 600 forecastCurrent 642; 3m 640; 6m 645; 12m 660; 12m total return 6.1%The table shows European equities as 3m UW and 12m UW.
• Gold forecastCurrent $4,006/troy oz; 3m $4,770; 6m $4,955; 12m $5,155; 12m spot return 28.7%Commodities are neutral overall, but gold is 12m OW.
• Oil forecastWTI current $83/bbl, 12m $70; Brent current $88/bbl, 12m $74Corresponding 12-month spot returns are both about -16%, implying an expected decline in oil prices.
• US 10-year TreasuryCurrent yield 4.55%; 3m 4.44%; 6m 4.39%; 12m 4.29%; 12m total return 7.1%The table shows US 10-year Treasuries as 3m OW and 12m OW.
• Equity momentum performanceS&P 500 Momentum underperformed the market by about 5% week over weekThe main text states that the Momentum/AI unwind continues to extend.
• Energy price statusGasoline and natural gas prices are less than 10% below their highs for the yearThe main text notes that price gains in energy products are more pronounced.

Impact & implications

The implication for portfolios is that relying solely on traditional stock-bond or cross-asset diversification may become less effective, because average correlations across regional equities and across asset classes have risen since the start of the month; more effective short-term portfolio balance may come from style selection within equities under high dispersion and from real-asset equities. At the same time, over a 12-month horizon, an overweight in equities can still express support from earnings growth, but growth shocks should be hedged with puts on indices or sectors with low implied volatility.

Risks

• An escalation in Middle East tensions could push energy prices even higher, potentially reigniting inflation and policy rate risks.
• More hawkish Fedspeak or volatile inflation data could pressure risk-asset valuations.
• Continued unwinding in Momentum/AI capex-related trades could weigh on equity index performance.
• Rising correlations across asset classes and regional equities reduce the effectiveness of traditional diversification.
• Crowded long positioning and macro headwinds may suppress risk-adjusted returns in the short term.
• Growth shocks could create downside risks for Russell 2000, US Consumer Discretionary, US Banks, China equity, and the S&P 500.
• Credit spread valuations are expensive, and spreads could widen if risk appetite declines.

What to watch

• Whether oil, gasoline, and natural gas prices continue to approach or break above their highs for the year.
• Whether US 2-year inflation pricing, core CPI, and Fedspeak change the market's view of the Fed path.
• Whether S&P 500 Momentum and AI capex-related stocks continue to underperform.
• Whether defensive/quality and real-asset equities such as Low Vol, Dividend Aristocrats, REITs, and Infrastructure continue to deliver positive returns.
• Whether cross-asset correlations, stock-bond correlations, and credit-equity volatility correlations continue to rise.
• Whether CFTC positioning, global fund flows, and risk appetite indicators show further crowding in risk assets.
• Whether the market-implied probability of a US recession and the probability of a large S&P 500 drawdown move higher.
• Whether implied volatility on index and sector puts remains relatively low.