After Risk Repricing, Equities and Carry Strategies Still Have Upside

Overview

The report evaluates global markets around three intersecting forces: oil prices and the Iran situation, the Federal Reserve and long-end rates, and the AI theme. Goldman Sachs' baseline judgment has not changed materially because of July's volatility: recession risk is low, economic growth is resilient, core inflation is expected to continue improving, the Federal Reserve is likely to remain on hold, and corporate earnings and AI capex remain solid. The main change comes from market pricing and positioning, as July's risk release makes risk assets more sensitive to positive developments in August.

Core views

Equities and carry strategies still have room for further near-term upside, but the opportunity comes from risk premium and positioning repair rather than risks having disappeared. Oil price tail risks, inflation stickiness, setbacks to AI earnings expectations, and global term-premium shocks could still reignite volatility, with further upside in long-end yields being the most direct short-term threat. The AI theme requires distinguishing between revenue and valuation redistribution within the ecosystem and market skepticism about the overall incremental revenue from AI; the former mainly increases single-stock and rotation volatility, while the latter could simultaneously depress broad equity indices and rates while pushing macro volatility higher. In FX, intervention is unlikely to reverse the yen trend on its own, while the renminbi needs both gradual appreciation and expansionary domestic-demand policies to promote internal and external balance.

Analysis framework

The report uses a cross-asset framework combining baseline and tail scenarios, comparing changes in macro fundamentals with changes in market prices, positioning, and the event calendar, and assessing whether risks have been priced through the interaction among equities, rates, FX, commodities, and volatility. The focus of the analysis is not to provide a single-point market target, but to identify where current prices sit within different outcome distributions and the corresponding trading opportunities.

Methodology notes

• Scenario AnalysisModal Baseline Scenario

  Use the most likely macro path as the benchmark for asset allocation while maintaining ongoing assessment of tail risks.

  The baseline scenario assumes low recession risk, solid growth, improving inflation, and the Federal Reserve remaining on hold, thereby supporting equities, carry strategies, and lower macro volatility.

• Cross-Asset AnalysisPrice-Positioning-Fundamentals Three-Dimensional Framework

  Distinguish changes in fundamental forecasts from changes in market prices and positioning.

  The adjustment in market prices and leveraged positioning in July was clearly larger than the change in baseline forecasts, so the opportunity in August mainly stems from risks being more fully priced and positioning becoming cleaner.

• Thematic Risk AnalysisAI Pie Size and Share Framework

  Distinguish changes in AI's overall economic value from changes in value distribution within the AI ecosystem.

  Changes in shares within the ecosystem mainly affect single stocks, semiconductors, and rotation volatility; if the market questions AI's overall incremental revenue, monetization speed, or financing sustainability, it could depress broad equity indices and rates while pushing volatility higher.

• Risk ManagementImplied Volatility Tail Hedge

  When implied volatility is low, use options to protect directional risk-asset positions.

  Overall macro volatility is contained and implied volatility in some FX markets is low, allowing long equity and carry portfolios to obtain relatively feasible tail protection through options.

Asset mapping & comparison

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

• Global equities

  Short-term bullish

  Strengths

  Solid growth, strong earnings, improved positioning, and risk repricing support further gains.

  Weaknesses

  After valuation increases, markets are more sensitive to changes in rates and earnings expectations.

  Comparison

  The market structure in early August is better than it was entering July, because risks are more fully priced and important events have been partially cleared.

  Risks

  Rising long-end yields, another oil price spike, and doubts about the overall AI earnings logic.

• AI-related equities

  Fundamentals remain solid but dispersion is intensifying

  Strengths

  Second-quarter earnings were solid, the AI capex cycle is still advancing, and some valuations have fallen significantly.

  Weaknesses

  Value concentration is high, and revenue distribution and financing needs within the ecosystem will amplify single-stock volatility.

  Comparison

  Semiconductor and infrastructure providers have borne a larger correction, while value within the AI ecosystem is being redistributed toward different segments.

  Risks

  Innovation or monetization slower than expected, capex facing financing constraints, and downward revisions to overall incremental revenue.

• U.S. long-end Treasuries

  Yields face upside risk

  Strengths

  Current yield levels are already relatively high, and safe-haven demand may return under a deep growth shock.

  Weaknesses

  Fiscal deficits, corporate financing, and AI capex add pressure on real rates.

  Comparison

  Compared with front-end rates, long-end rates are more likely to become the near-term speed limit for risk assets.

  Risks

  Rising term premium and transmission of rate shocks from Japan or the U.K. to global markets.

• Carry strategies

  Short-term bullish

  Strengths

  Overall macro volatility is contained, and volatility in some FX markets is especially low.

  Weaknesses

  Returns are usually limited, but positions may draw down quickly during sudden macro shocks.

  Comparison

  Under the benign baseline scenario, their risk-reward profile is better than directly chasing assets that have already risen rapidly.

  Risks

  Escalation of geopolitical conflicts, policy surprises, and liquidity shocks leading to volatility jumps.

• Crude oil

  Expected to be capped at high levels, but tail risks remain

  Strengths

  Geopolitical conflict and supply-route risks can provide price support.

  Weaknesses

  If the strait reopens and the conflict lacks momentum for further escalation, the risk premium may fall back.

  Comparison

  After breaking above $100 per barrel in July, the market has already reflected supply concerns relatively fully.

  Risks

  Deterioration in the Iran situation, transport disruptions, or failure of the reconciliation process.

• Japanese yen

  Near-term appreciation may gradually fade

  Strengths

  Valuation is significantly low, and Japan has a large stock of net overseas assets.

  Weaknesses

  If Japan's policy mix and global growth outlook remain unchanged, FX intervention alone is unlikely to create a sustained appreciation trend.

  Comparison

  The scale of this round of intervention and the way the U.S. participated are different, but its main effect remains similar to buying time.

  Risks

  A sudden shift in Japanese policy, institutional capital repatriation, or a significant deterioration in global growth may lead to a sharp yen appreciation.

• Renminbi

  Tilt toward gradual appreciation

  Strengths

  A strong current account and significantly low valuation; appreciation would help ease external imbalances.

  Weaknesses

  Domestic demand and real estate investment remain weak, and a low-inflation environment constrains policy space.

  Comparison

  The report argues that renminbi appreciation and expansionary domestic-demand policies are not mutually exclusive and should be advanced together.

  Risks

  Escalation of protectionism by trading partners or deterioration in trade relations among major economies.

• Pound sterling and U.K. government bonds

  Cautious on sterling, with downside room for U.K. government bond yields

  Strengths

  U.K. earnings growth is strong, and the new government's early performance has eased some pessimism.

  Weaknesses

  Sterling is already the most highly valued currency in the G10, and market pricing for rate hikes is clearly above economists' baseline expectations.

  Comparison

  If the October budget reflects fiscal prudence, U.K. government bond yields may decline and the curve may steepen, while sterling may come under pressure.

  Risks

  The budget fails to balance growth, spending, and fiscal discipline, or inflation forces the Bank of England to become more hawkish.

Key data

• July oil price peakAbove $100/barrelThe oil price spike led to more fully priced energy and inflation risks.
• Semiconductor and memory sector correctionMarket value down about 20%Reflects deleveraging and valuation reset in AI-related exposures.
• U.S. 30-year real yieldRose above 3%A clear new high for this cycle and an important constraint on risk assets.
• Estimated yen purchases by Japanese authoritiesUp to about $85 billionOccurred from July 30 to 31, 2026, and may have been the largest two-day intervention since 2011.
• China's June trade surplus$125 billionAbout $1.5 trillion annualized, highlighting the economic divergence between strong external demand and weak domestic demand.
• Renminbi valuationAt least about 20% undervalued against the U.S. dollarGoldman Sachs judges based on its valuation indicators that gradual nominal appreciation would help the real exchange rate return to a reasonable level.
• Impact of gold importsAbout 1 percentage point of GDPThe report estimates that the increase in gold imports this year has reduced China's trade surplus accordingly.
• U.K. corporate earnings growthAbout 20%Strong earnings have recently pushed major U.K. equity indices to new highs.

Impact & implications

At the portfolio level, investors can continue to favor long equities and carry income, but should not treat the post-July rebound as evidence that risks have disappeared. In the near term, attention should focus on guarding against the pressure from a breakout in long-end rates on valuations and risk appetite, while using low implied volatility to establish option protection. Over the medium to long term, deeper shocks from AI capex or the economic cycle could appear as simultaneous declines in equities and rates, so hedge design cannot rely solely on bonds rising during equity drawdowns.

Risks

• An escalation of the Iran situation or renewed obstruction of key energy transport routes pushes oil prices and inflation expectations higher.
• Core inflation proves stickier than expected, prompting the Federal Reserve to resume rate hikes.
• Fiscal deficits, corporate financing needs, and term premium jointly push global long-end real rates higher.
• AI innovation, monetization, or capex returns fall short of expectations, triggering a spread from single-stock corrections to macro risk.
• After rapid gains in equities and carry strategies, crowded positioning reforms, making markets more sensitive to negative news.
• Weak domestic demand in China and an expanding external surplus trigger a stronger protectionist response.
• Changes in the U.K. budget or Japanese policy create rate and FX shocks that spill over into global markets.

What to watch

• The subsequent improvement in U.S. core inflation and the Federal Reserve's policy path.
• U.S. 30-year real yields, term premium, and corporate financing costs.
• Oil prices, the Iran situation, and the recovery of key energy transport routes.
• AI capex, earnings of major technology companies, and whether leveraged positioning continues to decline.
• The Jackson Hole meeting in the last week of August and remaining mega-cap technology earnings reports.
• The yen's movement after intervention and changes in Japan's policy mix.
• The pace of renminbi appreciation, China's domestic-demand support policies, and protectionist reactions from trading partners.
• The U.K. October budget and adjustments to Bank of England rate-hike pricing.