What’s on the Minds of Our CIOs?
Outlook and Views
Global economies may face near-term headwinds from tariffs but remain supported over the medium term due to robust private sector fundamentals, looser and expansive monetary and fiscal policy, and accelerated AI capital expenditures.
Heading into 2026, we believe growth in the US faces potential drag from trade and immigration, but risks may be mitigated by policy easing, fiscal stimulus, and prospective AI investments. Economies outside the US, such as the Euro area and Japan, are also expected to remain resilient, aided by easing monetary policy, expansive fiscal stimulus, and trade.
We expect global inflation to continue converging toward central bank targets in 2026. In the US, inflation may decline more slowly than previously expected. This is partly due to tariffs which are likely to create a temporary rise in core PCE inflation.
In Japan, underlying inflation has moved above target due to easy financial conditions, strengthening wages, and rising inflation expectations. Risks to inflation include tariffs potentially delaying convergence and the possibility of inflation expectations becoming unmoored, especially if supply chain disruptions emerge, given past experiences with inflation spikes. The market in the eurozone is seen as underestimating the potential for inflation to undershoot its target.
We believe the Federal Reserve (Fed) will continue down an easing path after cutting in October. The Federal Reserve lowered rates in December, and we anticipate further rate cuts in March and June 2026. Outside the US, the European Central Bank (ECB) is nearing the end of its easing cycle but may cut interest rates again in 1H 2026 if inflation undershoots. The Bank of England (BoE) is likely to resume its cutting cycle as inflation and growth risks balance.
Conversely, we expect that the Bank of Japan (BoJ), despite refraining from hiking in October, to hike by year-end due to high inflation, resilient growth, and loose financial conditions. Fiscal policy also plays a role, with expected easing in Germany, Japan and the US, while the UK faces fiscal tightening. China's government prefers delaying further positive impulse from easing measures until early 2026.
From a multi-asset perspective, we maintain a neutral stance on global equities given a balanced risk/reward profile, with solid corporate fundamentals but tariff exposure creating downside risk to forward earnings. Elevated US valuations leave limited tolerance for growth disappointment, while ongoing structural reforms and supportive fiscal policy in Europe and Japan – together with generally healthy corporate balance sheets – help cushion external shocks.
Despite recent volatility, equities have largely retained momentum after a strong earnings season, and year-end seasonality offers a supportive tailwind even as valuations remain demanding. The outlook on emerging markets (EM) has become more constructive amid evolving macro dynamics and policy dispersion. Additionally, US monetary policy easing has historically been associated with looser financial conditions, providing an incremental support pillar for risk assets.
We remain neutral on interest rates, as terminal rate pricing in the US and Euro area appears broadly reasonable, while Japan’s sustained reflation argues for a continued movement higher in Japanese Government Bond (JGB) yields. Should the US labor market stay resilient in the near term, the balance of risks could shift toward fewer cuts, particularly with growth expected to firm into 2026. We see what the Fed will do over the next few meetings as fairly priced into the market but forecast a curve steepening to take advantage of both rally and selloff scenarios.
In Euro area, we remain bullish and maintain a steepening tilt given the risk that inflation undershoots target and prompts additional ECB easing. Elsewhere, a loosening UK labor market supports our constructive view on gilts, and we are less favorable in Japan due to BoJ potentially tightening more than market expects from robust inflation and growth prints. We are neutral across other G10 markets where easing cycles largely look complete, and growth is recovering.
Long-dated sovereign bonds remain under pressure as investors reassess fiscal credibility across key markets, with sizable fiscal support in Japan, ongoing budget uncertainties in France, and lingering concerns about the UK’s fiscal stance, while prospective US and German initiatives could add to supply and term premium pressures into the coming year.
From a multi-asset perspective, in credit, US spreads remain historically tight and European spreads are similarly rich; while fundamentals are broadly stable, emerging pockets of stress, particularly in Autos, argue for maintaining a cautious stance until valuations offer more compensation for risk.
We also expect continued sector dispersion in US and Europe, notably across Autos, Energy, and Healthcare, reinforcing a selective, security level approach over broad beta. In the US, persistently large fiscal deficits elevate concerns around debt sustainability and can undermine demand for long duration, potentially lifting the long end via a higher term premium.
Recent credit events in private credit have sharpened focus on underwriting standards and the possibility we are later in the cycle, yet robust earnings and healthy balance sheets still point to a mid-cycle backdrop for now. Even so, a renewed upswing in animal spirits, with more M&A and LBO activity, could erode future earnings resilience and tip the balance toward a later cycle risk profile.
Our teams hold divergent views on currency positioning, reflecting varied perspectives across multi-asset solutions and fixed income strategies. For the US dollar, our multi-asset solutions team is currently underweight over the medium term, while our fixed income perspective is modestly overweight. This fixed income view is supported by US equity leadership linked to AI-adjacent sectors, an ongoing fiscal impulse, and a cooling, rather than collapsing, labor market, which reduces the scope for aggressive Federal Reserve easing.
Similarly, on the Japanese yen and British pound, our global fixed income views remain underweight both currencies, citing concerns around fiscal sustainability and BoJ policy divergence. In contrast, within multi-asset solutions, we remain neutral on the British pound and are overweight the Japanese yen.
Despite these divergences, directional dollar positioning has turned modestly positive as valuation and trend have normalized, and our view on the Euro is constructive amid improved external balances and anchored inflation expectations. Overall, we see currency opportunities best expressed through selective carry and trend exposure, with a modest USD tilt as cyclical and policy divergences persist.
For more, see Navigating the Nuances Across Public Markets in 2026.
Following the money in AI source: Bloomberg, Goldman Sachs Asset Management. US M&A Momentum Source: Goldman Sachs Global Investment Research. As of September 2025. Hyperscaler AI Capex Accelerating source: Goldman Sachs Asset Management.
Top of Mind
What Macro Forces Will Drive Markets over the Next Cycle?
We see a mid‑cycle backdrop marked by tighter lending standards and elevated leverage, China’s still‑fragile recovery amid policy and property headwinds, and US fiscal and trade risks alongside mixed growth data and rich equity valuations.
- Credit Considerations. Recent credit events have raised concerns about lending standards from a fixed income perspective, and whether we could be at a later stage of the credit cycle. The current focus on debt issuance from AI hyperscalers has also brought into view potential headwinds to investment returns from the AI boom, such as power bottlenecks to data centers. Overall corporate earnings and balance sheets remain robust however, but we are cognizant that the return of more M&A and buyout activity could point toward upcoming late-cycle adoption. From a systematic standpoint, current heightened amounts of leverage keep the risk of spillover from unforeseen credit events at top of mind.
- China’s Path Forward. The direction of the Chinese economy is a critical question on the mind of our multi-asset and quantitative investment CIOs. The country has faced a number of external headwinds in the form of antagonistic trade policy, while domestic consumption, the property market and confidence remain weak. Investor sentiment remains sensitive to policy and regulatory response, however, and attitudes have improved somewhat as clarity on certain tariff measures have increased.
- US Debt, Trade and Economic Health. US debt levels remain persistently high, which going forward has the potential to weigh on investor confidence in Treasuries at the long end of the curve. We also recognize the role that higher effective US tariffs may play – including possible supply chain disruptions and lower business confidence – even though a large shock or significant change in corporate behavior is yet to be apparent. Hard and soft data in the US also continue to be contrasting, with domestic equity valuations appearing rich at a time when the labor market and inflation dynamics seem relatively weak.
Is Europe's Fiscal Shift a Buying Opportunity?
The eurozone is pivoting toward an expansionary fiscal stance in 2026, anchored by NextGenerationEU1 and Germany’s reformation programs. We foresee opportunities in selected sectors like banks and infrastructure but monitor potential overvaluation risks in defense.
- Eurozone Fiscal Push May Provide Tailwind to Germany. Among the member states, we believe that Germany may be most well-positioned to receive benefits from the NGEU funds, given that it may sustain higher levels of debt relative to other countries including France, Italy, and Spain. Markets initially reacted positively but shortly waned as companies signal caution regarding the impact of the policy. German indices (DAX and MDAX) generated negative returns over the last six months, and latest earnings forecasts from companies have shown modest negative revisions. We believe this is potentially a strong set-up for equity investors looking for an upside earnings surprise next year.
- European Equity Remains Attractive Relative to the US. Combined with fiscal expansion and potential upside surprise from corporate fundamentals, the case for Europe remains strong. Additionally, we believe projected GDP growth in Germany is forecast to outpace other major Eurozone economies in 2026. That said, an active management approach remains crucial, as the German equity indices have a low exposure to domestic revenue (<20%) due to significant export-orientated segment. Specific sectors on our watch include: 1) banks, due to attractive valuations, positive earnings revisions, and benefits from a steepening yield curve; 2) utilities, due to regulatory tailwinds from ‘green’ infrastructure spending; and 3) infrastructure and materials.
- Defense Overvaluation Risk on Watch. One key risk that our team is focused on is the potential risk of overvaluation in the European defense sector, given much of the sector’s growth potential is already priced in, with the GS European Defense Index up more than 250% over three years and Rheinmetall trading at richer multiples than Nvidia. Selectivity is required in this sector. Key risks for the sector include: 1) potential windfall taxes, 2) supply and demand shifts in equipment used in modern warfare with the increasing role of drones, and 3) sustainability of currently high profit margins given political instability.
Is Today’s AI Funding Wave Sustainable Given Rising Interconnectedness?
The AI buildout is driving unprecedented hyperscaler capex and funding needs, tightening power and ecosystem constraints, yet supported by attractive GW-scale data center economics and stronger cash generation and balance sheets than prior tech cycles.
- Hyperscaler Capex is Surging. Hyperscaler capital expenditure on AI and data centers is growing at over 70% CAGR and could exceed $0.5tn by 2026, supported by a wave of strategic AI partnerships across chips, cloud, and infrastructure (e.g., OpenAI with Nvidia/AMD/Oracle/Broadcom; Anthropic with AWS/Google/Microsoft), as hyperscalers race to add compute and capacity.
- Stronger Fundamentals Than the Dot-Com Era, Despite Circularity Concerns. Unlike the early 2000s, today’s AI build-out is anchored in real constraints around compute, training costs, and data center capacity, alongside genuine adoption, usage growth, and monetization. By 2027, hyperscalers are expected to generate roughly $1tn in cash flow against about $800bn in capex, pointing to a more sustainable cycle even as investors remain focused on circularity and interdependence across AI partnerships and financing structures.
- Gigawatt-Scale Data Centers can be Economically Attractive. Large, GW-scale data center projects can deliver attractive base-case IRRs, assuming renewal discounts after the initial five-year term are kept at or below 30% and GPUs remain productive for at least six years. Early indications suggest renewal pricing is holding up in what remains a supply-constrained market for high-end AI compute.
- Financing Needs are Large, but Balance Sheets Remain Key Strength. Over the next three years, hyperscalers face sizable funding requirements, with free cash flow doing most of the heavy lifting and around $300bn of additional investment-grade issuance (roughly $97bn per year) likely to increase their weight in IG indices through 2028. Elevated supply has contributed to tech bond spreads lagging the broader market, but most players still have fortress balance sheets and ample debt capacity. Key swing factors include renewal pricing, GPU life, and the pace at which permitted capacity is converted into revenue-generating, GW-scale data centers, where more than $150bn of AI capex-linked financings already span public bonds, private credit, and asset-based structures.
The Bottom Line
In a market shaped by shifting policy, credit dynamics, and uneven growth, staying active matters: we favor disciplined risk management, selective security selection, and dynamic allocation to areas where fundamentals and policy tailwinds align, such as quality balance sheets, targeted European opportunities, and AI‑related infrastructure beneficiaries. This approach aims to balance resilience with readiness, helping navigate uncertainty while preserving flexibility to capture upside as catalysts emerge.
For more, see our 2026 Investment Outlook Seeking Catalysts Amid Complexity.
1NextGenerationEU (NGEU) refers to the funding made available to help European Union member states to recover from the economic and social impacts of COVID-19 and primary deficit.
