Market Pulse October
Recent data confirm that the US labor market has softened and the US government shutdown will not help alleviate concerns. Given AI developments and our expectations for below-trend GDP growth, underlying job growth is likely to remain below the breakeven rate needed to keep the unemployment rate stable, at least in the near-term. Our colleagues in Global Investment Research estimate U3 unemployment will rise to 4.5% this year before recovering in 2026.
We expect US inflation to peak at the end of 2025 as full tariff rates take effect, companies exhaust pre-tariff inventories, and prices are passed on to consumers. GS GIR estimates US core PCE will reach 3.2% before falling to the low-2s by 2027 as declining wage pressures prevail.
When balancing the near-term risk of rising unemployment with the likely one-off price impact of tariffs, we think the Federal Reserve will prioritize growth and continue its series of “risk management” cuts. We expect consecutive 25bp cuts in October and December this year, and quarterly 25bp cuts in March and June 2026 to a terminal rate of 3.0% – 3.25%.
Source: Goldman Sachs Global Investment Research and Goldman Sachs Asset Management. As of September 30, 2025. Chart shows S&P 500 price returns following 8 instances over the past 40 years where the Federal Reserve cut interest rates after holding rates steady for at least 6 months prior to the cut. Dates of cuts in analysis include July 13, 1990, September 29, 1998, January 3, 2001, November 6, 2002, June 25, 2003, September 18, 2007, August 1, 2019, and September 18, 2024. “N” refers to number of periods.
As the economy moves past peak tariff uncertainty, we expect to see steady US growth and further gains for US equities supported by policy easing and strong earnings. Over the past 40 years, the S&P 500 has typically delivered positive returns after the Federal Reserve resumed cuts following a 6+ month pause, provided the economy continues to grow.
Lower rates and reduced macro uncertainty will be a catalyst for private market activity, in our view. Private equity deal activity has already increased 24% YoY in 1H 2025 and exits have seen an uptick as IPO markets reopen. We expect private credit to continue to be a major source of funding for deals, as well as a secondary line of liquidity for investors.
We see further upside for gold, driven by structurally strong central bank demand and ETF buying. Global central banks hold on average ~20% of reserves in gold, with DMs at the high end at 30% and EMs near 10% with the potential to double over the next 3 years. Meanwhile, Fed easing, inflation risk, and policy uncertainty may amplify speculative inflows.
Asset Class Forecasts: Price targets of major asset classes are provided by Goldman Sachs Global Investment Research. Source: “Earnings season ahead.” As of October 6, 2025.
Fixed Income Opportunity Set
The Federal Reserve has resumed its easing cycle and the direction of global bond yields looks lower as we move towards 2026. For the dynamic fixed income investor, we still see opportunities across the market to optimize for income while managing duration and spread risk. US securitized credit appears particularly attractive, in our view.
Source: Bloomberg and Goldman Sachs Asset Management. As of September 25, 2025. Chart shows the one-year expected carry based on current yields. Carry is calculated as current yield plus rolldown return, which is a function of the change in yields multiplied by current duration.
Global yield curves have steepened as rate cuts have driven the front-end lower while long-end rates are likely to stay sticky. Investors are again being paid to extend duration, where yields are attractive and additional capital gains are available by rolling down the yield curve. Although investors may be concerned about yields backing up, we estimate the 10Y would need to pick up 60bps in the US and 40bps in Germany over the next year to offset elevated income levels today.
Source: Bloomberg and Goldman Sachs Asset Management. As of September 30, 2025. Chart shows the yield-to-worst of the Global Aggregate Corporate Index hedged, advanced by 5 years, and the 5-year return of the index. The correlation between yields and returns is 0.74.
Corporate bond investors have continued to strike the balance between earning income and managing risks. While spreads are tight, particularly in the US, credit fundamentals remain healthy and the income potential of both IG and HY credit looks attractive. Historically, the Global Aggregate Corporate Index yield has shown a strong correlation with future returns. Given current yields, we believe this relationship suggests mid-single digit annualized returns in the next five years.
Source: Macrobond and Goldman Sachs Asset Management. As of September 30, 2025. Chart shows the option-adjusted spread percentile of different credit securities today since 2000.
Current valuations make it increasingly challenging to identify compelling value opportunities. However, US securitized credit continues to offer a valuation advantage. We believe that stabilizing delinquencies, sustained investor demand, and declining interest rates should contribute to spread compression within this asset class. Specifically, spreads in US asset-backed securities (ABS) and mortgage-backed securities (MBS) currently stand at the 45th and 23rd percentile, respectively.
