Goldman turns more bullish on equities ahead of Q3 earnings, upgrades bonds

Investing.com -- Goldman Sachs said in a note Monday that it has moved back to an overweight position on equities over three months and upgraded bonds to overweight over 12 months, telling investors that lower valuations have improved the setup heading into third-quarter earnings.

Strategist Christian Mueller-Glissmann noted that risky assets have consolidated since the summer as rising rates and energy prices offset earnings tailwinds.

Global equities have moved largely sideways despite healthy earnings, with pressure concentrated in rate-sensitive areas such as small caps, real estate and infrastructure.

Higher yields have also started to weigh on credit, with corporate spreads widening and euro area sovereign risk repricing.

“Earnings growth remains supportive for equities and the recent valuation de-rating has improved asymmetry into the Q3 earnings season,” Mueller-Glissmann wrote.

On bonds, the bank increasingly sees long-duration debt offering better medium-term value as inflation normalizes and central bank expectations become less hawkish. Tactically, however, Goldman still prefers shorter-duration fixed income and remains overweight cash.

Goldman’s macro baseline remains constructive, with healthy growth, low recession risk and inflation momentum moderating into 2027. It described that combination as more of a “Goldilocks” backdrop.

“We believe bonds should gradually move from portfolio headwind to hedge,” the strategist added.

The bank continues to favor equities over credit, noting that spreads remain tight relative to all-in yields. Within equities, it prefers a barbell of AI beneficiaries alongside selective rate-sensitive, high-dividend and low-volatility stocks.

Near term, Goldman expects rates volatility, Middle East tensions and U.S. midterm election uncertainty to keep markets choppy.

Mueller-Glissmann concluded: “We would use call options to add selectively to equities but maintain tactical cash balances. Front-end receivers, VIX call spreads and targeted FX hedges continue to offer attractive protection against a more material tightening in financial conditions.”

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