Goldman Sachs: Macro Base Case Unchanged, Short-Term Bullish After Market Overreaction

Overview

This Goldman Sachs Global Market Views report points out that despite severe volatility in July, institutional base-case forecasts for three core variables—oil, interest rates, and AI—have not changed. With risks fully priced in, positions cleared, and earnings season confirming robust fundamentals, the August market setup has improved significantly. The report believes there is still upside potential for equities and carry strategies in the short term, but investors should be wary of tail risks such as rising long-end rates and are advised to use the current low-volatility environment for hedging.

Core views

Markets experienced a triple shock in July driven by the situation in Iran, uncertainty regarding the Federal Reserve's policy path, and leveraged AI positions, but this instead created conditions for a rebound in August. The report argues that concerns about these three aspects have been relatively fully priced in during July: oil prices once broke through $100/barrel, the semiconductor sector lost 20% of its market value, and US 30-year real yields hit cyclical highs exceeding 3%. Entering August, with the FOMC meeting and major tech earnings reports concluded, the risk event calendar has lightened, and core inflation data continues to improve, causing market pricing to rapidly revert to institutions' benign base case. As long as no new major negative catalysts emerge, this mean reversion from 'overly pessimistic' to 'base case' will support further gains in risk assets. The investment logic for the AI theme is shifting from 'broad-based rise' to 'divergence', but the overall capital expenditure cycle remains solid. Q2 earnings showed solid profitability for AI infrastructure providers, with capital expenditure plans proceeding as scheduled. The previous pressure on the semiconductor sector stemmed more from forced deleveraging by leveraged funds rather than deterioration in fundamentals. The report emphasizes the need to distinguish between 'cake size' (the total increment brought by AI) and 'cake share' (the distribution of value within the industry chain): recent volatility mainly belongs to the latter, i.e., the redistribution of value within the AI ecosystem, which has limited impact on macro assets; only when the market begins to question the monetization ability of AI innovation or encounters financing bottlenecks in the investment cycle (i.e., 'cake gets smaller') will widespread macro selling occur. Currently, this systemic risk has temporarily receded to a secondary position. Rising long-end rates are viewed as the biggest short-term threat, driven by structural supply-demand imbalances rather than simple economic overheating. Although core inflation is moderate, massive fiscal deficits and corporate financing needs (partially driven by AI capex) are pushing up real rates and term premiums. If economic growth remains strong and stocks continue to rise, long-end yields may rise further and become the market's 'speed limiter'. Additionally, term premium shocks in Japan or the UK could spill over into global bond markets again. In contrast, front-end rates have room to decline due to improving inflation, providing some buffer for risk assets. Exchange rates and macro landscapes across major economies show significant divergence. Regarding the yen, although recent US-Japan joint intervention scale hit the highest level since 2011, intervention effects are expected to gradually fade unless Japan's policy mix changes or global growth deteriorates significantly; however, Japan's huge stock of net foreign assets means that if institutions like GPIF increase domestic allocation, they can still effectively support the yen. Regarding China, the economy shows characteristics of 'strong external, weak internal', with June's trade surplus hitting a record $125 billion, while retail and real estate remain sluggish. The report believes that resolving this imbalance cannot rely solely on stimulating domestic demand or currency appreciation alone, but requires a dual approach of RMB nominal appreciation (currently undervalued by approximately 20%) and expansionary fiscal policy to avoid protectionist backlash from trading partners. Regarding the UK, despite pessimistic sentiment, strong earnings growth pushed the index to new highs, and the pound is also the most overvalued currency among G10 currencies; the real test lies in whether the new government's first budget in October can balance growth and fiscal discipline, and market pricing for Bank of England rate hikes through the end of 2027 is significantly higher than the institutional base case, which may bring downward pressure on the pound in the coming months.

Analysis framework

The report adopts an analytical framework of 'Base Case vs. Market Pricing Distribution'. The core logic does not lie in predicting changes in macro variables themselves, but in assessing the position of current market prices relative to the institutional base case. When markets overprice risks due to panic (such as in July), even if the base case remains unchanged, it implies an improved risk-return ratio; conversely, the same applies in reverse. When analyzing structural themes such as AI, the report employs a 'Total vs. Structure' dichotomy, separating 'cake size' risks that affect macro assets from 'cake share' risks that only affect individual stock rotation, helping investors determine whether the current downturn is a buying opportunity or a signal of a systemic crisis. For exchange rate analysis, the report combines valuation models (such as fair value calculations) with policy reaction function analysis, emphasizing that pure currency intervention without coordination from macro fundamentals or policy mixes usually has only temporary effects, thereby avoiding linear extrapolation from single events.

Methodology notes

• Event Gaming and Behavioral FinanceExpectation Gap/Expectation Management

  Analysis of Deviation Between Base Case and Market Pricing Distribution

  The report's core trading logic is not based on changes in macro forecasts, but on the degree of deviation between market pricing and the institutional base case. When markets overprice risks due to emotional overreactions, even if fundamentals remain unchanged, it constitutes a window for counter-trend trading; this method helps investors identify 'mispriced' opportunities rather than blindly chasing trends.

• Industry/Industrial Analysis Framework

  Dichotomy of 'Cake Size' and 'Cake Share' in AI Risks

  AI-related risks are distinguished into 'total risks' (such as technological disproof or financing breakdown) that affect the entire market and 'allocation risks' (such as profit redistribution in the value chain) that only affect individual stock rotation. Only the former triggers correlated declines in macro assets, while the latter is more of a micro-level structural adjustment; this framework helps maintain macro stability amidst AI sector volatility.

• Macroeconomic frameworkPurchasing power parity

  Fair Value of Exchange Rates and Real Equilibrium Exchange Rates

  The report uses model calculations to estimate that the RMB is undervalued by approximately 20% and the yen is highly undervalued, using this as an anchor for judging long-term exchange rate trends. When market prices deviate severely from this fair value, even if there are short-term interventions or emotional disturbances, the force of medium-to-long-term return to equilibrium remains the dominant factor.

• Fixed Income and Credit AnalysisSpread analysis

  Drivers of Long-End Rates from Fiscal Deficits and Term Premiums

  In a context where inflation is controlled, upward pressure on long-end rates mainly comes from the supply side: huge fiscal deficits and corporate financing needs increase bond supply, pushing up term premiums. This perspective reminds investors that even if central banks pause rate hikes, long-bond yields may still rise independently due to supply-demand imbalances.

Key data

• China June Trade Surplus$125 BillionHit a historical record, annualized at $1.5 trillion, highlighting the divergence between strong external demand and weak domestic demand.
• Degree of RMB UndervaluationAt least 20%Relative to fair value against the USD; if gold import factors are considered, the degree of undervaluation may be higher.
• Japan End-of-July Intervention ScaleUp to $85 BillionTwo-day forex purchase scale on July 30-31, the largest two-day operation since the Fukushima disaster in 2011.
• Peak US 30-Year Real Yield>3%Reached cyclical highs in July, reflecting the market's repricing of long-end risks.
• Semiconductor Sector July Decline20%Significant pullback experienced by AI infrastructure provider market values in July.
• UK Stock Market Earnings Growth RateApproximately 20%Strong earnings growth year-to-date has pushed the FTSE index to new highs.

Impact & implications

The report believes the current market environment is generally favorable for risk assets and carry strategies, as macro volatility is suppressed and July's adjustments have washed out fragile positions. For equity investors, the AI sector adjustment offers an opportunity to enter at more reasonable valuations, but stock selection becomes more important, focusing on earnings realization capability rather than mere thematic热度. For fixed income investors, the warning of rising long-end rates suggests careful duration management, especially under the background of fiscal expansion where term premiums may remain elevated. In the FX market, the low-volatility environment supports carry trades, but investors should be wary of sudden reversals in specific currencies like the yen and pound due to policy or valuation factors. Overall, institutions recommend using the current window of low implied volatility to hedge tail risks such as a spike in long-end rates or disconfirmation of the AI theme via options and other tools, rather than maintaining completely naked long positions.

Risks

• Further rise in long-end government bond yields, becoming the main resistance limiting the rise of risk assets.
• AI innovation monetization speed falling short of expectations or the investment cycle encountering financing constraints, triggering macro-level selling.
• US inflation stickiness exceeding expectations, leading the Federal Reserve to restart rate hikes.
• Escalation of the situation in Iran or blockage of the Strait of Hormuz leading to loss of control over oil prices.
• Term premium shocks in Japan or the UK spilling over into global bond markets.
• The UK October budget failing to balance growth and fiscal discipline, triggering turmoil in the pound and bond markets.

What to watch

• Jackson Hole symposium in late August and the last batch of tech earnings reports.
• Subsequent trends in US core inflation data.
• Navigability of the Strait of Hormuz and tail risks for oil prices.
• Whether Japan's policy mix undergoes substantive changes.
• Changes in China's RMB exchange rate and implementation of fiscal stimulus policies.
• Details of the UK new government's first budget in October.
• Market implied volatility levels and changes in hedging costs.