Goldman Sachs is staying overweight equities over 12 months and advising clients to buy pullbacks, but warns that its risk appetite indicator at a four-year high raises the probability of near-term corrections.
Before we go any further, this note from GS was out prior to the strong rally on Thursday, US time.
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Summary:
- Goldman maintained an overweight stance on equities over a 12-month horizon, recommending investors use any near-term pullbacks as buying opportunities
- The bank’s Risk Appetite Indicator has climbed above 1.2, its highest reading since 2021, which Goldman said historically correlates with lower near-term return averages and a higher risk of corrections
- Equities have largely recovered from the initial Middle East shock, with markets near all-time highs since mid-April, supported by strong technology earnings and AI capital expenditure growth
- Goldman identified elevated bond yields, high energy prices, potential Strait of Hormuz escalation, and concentrated positioning in global technology stocks as key near-term headwinds
- The bank’s baseline scenario assumes inflation normalisation and a reopening of the Hormuz strait, which it said could support a more favourable macro environment
- Goldman recommended selective hedging strategies including put spread collars, factor diversification, and long-dated call options to manage equity exposure
Goldman Sachs is telling clients that equity returns are likely to cool from here but that the case for owning stocks over the next 12 months remains intact, and that any pullbacks in the coming months should be treated as entry points rather than exits.
The guidance comes from analyst Christian Mueller-Glissmann in a note to clients that takes stock of where markets stand following a sharp but narrow rally. Equities have recovered most of the ground lost after the initial shock of the Middle East conflict, with major indices near all-time highs since mid-April. Goldman attributes that recovery primarily to strong technology sector earnings and the continued expansion of AI-related capital expenditure, which has provided a reliable earnings growth floor even as the macro backdrop remains uncertain.
However, the bank is not sounding the all-clear. Its Risk Appetite Indicator has moved above 1.2, a level not seen since 2021, and Goldman is candid about what that historically implies. Elevated readings do not automatically signal a market top, but they are associated with lower average near-term returns and a measurably higher probability of corrections. The combination of stretched sentiment and concentrated positioning in global technology stocks is, in Goldman’s view, a reason for discipline rather than conviction in chasing the rally higher.
The geopolitical backdrop adds a further layer of complexity. Goldman identifies renewed escalation in the Middle East and the continued closure of the Strait of Hormuz as the most significant near-term risk factors. Either development, it warns, could sustain upward pressure on oil prices and bond yields, two variables that have already been acting as headwinds to equity valuations. The bank’s more constructive baseline assumes those pressures ease, with inflation normalising and Hormuz eventually reopening, but that outcome is treated as a scenario rather than a certainty.
To navigate the gap between a positive 12-month outlook and a cautious near-term posture, Goldman is recommending selective risk management. Put spread collars and factor diversification are among the tools the bank suggests for managing downside exposure, while long-dated call options allow investors to maintain upside participation without being fully exposed to near-term volatility. The overall message is one of calibrated optimism: stay long, build in protection, and be ready to add on weakness.
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Goldman’s continued overweight on equities over a 12-month horizon provides a floor for risk sentiment, but the correction warning will keep traders cautious about chasing further upside at current levels. The flagging of Hormuz closure and Middle East escalation as near-term risk factors is a direct transmission channel to oil and bond markets, with Goldman acknowledging that energy prices and yields could remain elevated if the baseline normalisation scenario fails to materialise
