What’s on the Minds of Our CIOs?
Outlook and Views
The global economy has shown surprising resilience despite trade policy uncertainty and US tariffs. The AI capex cycle has supported growth, firms appear better prepared than during the 2018/19 trade war, and financial conditions have eased due to expectations for monetary easing, AI momentum and a weaker dollar. In Europe, optimism over German fiscal policy has mitigated some tariff impacts.
However, the early 2025 boost from front-loading trade and consumer durable goods spending is now behind us. As tariffs stabilize, companies may pass on costs, potentially squeezing disposable incomes and slowing consumer spending.
Our base case anticipates continued economic expansion, driven by reduced tariff impacts, emerging fiscal support in Europe and the US, and ongoing monetary easing. However, we remain alert to tail risks, including a significant deterioration in the US labor market.
Global inflation dynamics remain mixed. US core CPI and PCE inflation have risen to around 3% this year, after decelerating in the previous two years. We expect tariffs to provide a short-lived boost, mainly in goods, while core services continue to ease due to a weaker labor market, slowing wage growth, and declining shelter inflation. We foresee Euro area inflation remaining around 2%, with risks of undershooting the ECB’s target. UK inflation has faced setbacks from sticky services inflation, but the fading impact of summer tourism and concerts, along with a weakening labor market, should help reduce price pressures.
In China, CPI inflation remains non-existent amid muted domestic spending, and PPI inflation is in deep deflation due to price declines in raw materials and intermediate goods. We do not expect a turnaround without broad-based demand stimulus. Japanese inflation has been above 2% for 41 consecutive months. A domestic upswing and yen weakness suggest inflation will persist.
We expect the Federal Reserve to deliver rate cuts in October and December, responding to labor market weakness, followed by measured easing in 2026. Outside the US, the ECB and BoE are likely to pause their easing cycles, having continued while the Fed was on hold for eight months. The ECB considers its policy to be “in a good place,” with peak trade uncertainty behind and potential fiscal tailwinds from Germany ahead. The BoE might resume easing in early 2026 as labor market weakness cools inflation. In contrast, we expect the BoJ to continue its gradual hiking path, addressing domestic price pressures.
We do not foresee any significant fiscal easing in major economies, with the US having already passed the One Big Beautiful Bill Act and Germany unveiling its historical fiscal push earlier this year. By contrast, we expect the UK Autumn Budget in late November to feature hard choices on tax rises and spending cuts, which may require backtracking on manifesto pledges. More broadly, high debt levels, high rates, and weak growth limit fiscal room.
From a multi-asset standpoint, our equity exposure aligns with our strategic asset allocation, which is moderately overweight. This position reflects the recognition of sound fundamentals, while also acknowledging elevated valuations and potential downside risks to growth.
Across fundamental equity and quantitative investment strategies, we see upside potential in small cap stocks, driven by relief from Fed easing, compelling valuations, robust earnings, and diversification benefits.
We also continue to see opportunities for investors to broaden their equity horizons beyond US large caps, capturing potential in Europe, Japan, and India. Lastly, we expect AI to remain a dominant driver of security selection, with earnings potential extending beyond the ‘Magnificent 7’.
Our multi-asset positioning aligns with our strategic asset allocation, which entails being moderately overweight front-end US rates. This reflects a balanced consideration of both downside growth risks and upside inflation risks.
Within fixed income portfolios, divergent central bank policies present cross-market opportunities. We are overweight on rates in small open economies like Canada, New Zealand, and Sweden, where domestic economic slack and global headwinds support further easing. Conversely, we are underweight Japanese rates, anticipating further rate hikes. We also expect the European yield curve to steepen, with potential ECB rate cuts if inflation dips below 2%, while long-end yields rise due to reduced demand from Dutch pension funds.
We are cautious on credit relative to equities within multi-asset portfolios due to tight spreads, despite healthy fundamentals and a favorable technical environment. High new supply has been well absorbed by demand from yield-oriented investors.
Within fixed income, we maintain moderate exposure to investment-grade credit, focusing on sectors with attractive income, such as securitized and high-yield credit. We also favor emerging market debt, which has performed well this year due to strong fundamentals, Fed easing, high real rates, a weaker dollar, and renewed global investor inflows, all of which we expect to continue driving gains.
We recently shifted from being underweight to neutral on the dollar in our fixed income portfolios. The dollar tends to rally or move sideways when the Fed cuts rates and no recession follows, supported by inflows into US equities despite lower yields.
Structurally, we believe the dollar's cyclical downtrend will continue due to overvaluation (particularly versus Asian currencies), global asset diversification, and increased currency hedging by global investors on US asset allocations.
Elsewhere, across fixed income, we are overweight the euro and Asian currencies.
Consumer spending source: Goldman Sachs Asset Management, Macrobond, BEA. As of July 2025. Based on 12-month moving averages. Long-run average is based on 1990-2019 data. Contribution to US Growth Source: J.P.Morgan US: The recent growth effects of AI capex (September 18, 2025).
Rise of Retail Investor Source: Goldman Sachs Asset Management estimates based on data sources from S&P Global Market Intelligence and Bloomberg. As of January 2025.
Figures in Focus
- The 9.8% share of US consumer spending driven by credit is significantly below the long-run average of 30%. This suggests that there is no excessive reliance on credit to drive consumer spending, reducing the risk of financial imbalances.
- In the first half of 2025, 0.5% of US growth has come from AI-related business investments, accounting for roughly one-third of the total 1.4% growth. The coming quarters will determine whether the AI footprint on economic growth will continue to expand or if some of the early 2025 strength was due to front-loading ahead of tariffs.
- The retail investor owns a 15% share of daily US equity trading volume. This figure has increased from approximately 10% before the pandemic, although it has decreased from the peak of 25% reached during the pandemic in 2020-2021. Retail investor participation in equity markets can create temporary price dislocations that active managers can exploit.
US Consumer Check-Up
Overview: Our economists and bottom-up credit, equity, and quant analysts have taken a comprehensive pulse check on the US consumer. Here's what we've uncovered:
- Spending: Pacing, Not Pausing. US consumer spending moderated in the first half of the year, reflecting payback from earlier front-loaded consumption, particularly in durable goods, possibly in anticipation of tariffs. Weaker job creation and wage growth suggest a period of moderate spending ahead, especially if the pass-through of tariffs to core goods prices was delayed rather than canceled. In addition, wealth gains have been heavily skewed towards higher-income households. Lower-income households, conversely, have seen their spending power squeezed by higher interest rates and inflation. Furthermore, potential spending cuts to programs like Supplemental Nutrition Assistance Program (SNAP) and Medicaid could cloud the outlook for these lower-income consumers. However, robust aggregate household balance sheets and anticipated Fed easing indicate that spending is unlikely to experience a sharp decline.
- Credit & Confidence: Beyond the Headlines. While delinquencies in auto and credit card loans have risen, particularly among subprime consumers, this trend is largely attributed to "credit score migration effects" from the pandemic and increased auto loan sizes, rather than a broad signal of household credit stress. Similarly, downbeat consumer sentiment alone may not be a cause for concern, as consumers have previously demonstrated a willingness to continue spending despite negative sentiment.
- Corporate Cheer, Consumer Choices. Corporate America expressed optimism in Q2 earnings, highlighting strong 'back-to-school' spending trends that often translate to solid festive season sales. However, consumer spending is increasingly driven by value-seeking behavior, focusing on cost, selection, and convenience. This has fostered deeper partnerships between traditional retailers, especially grocers, and on-demand delivery platforms, which appeal to lower-income and elderly households. Despite the added cost, the benefits of transportation savings, time efficiency, and enhanced accessibility outweigh the delivery fees.
- Strategically Selective: Investing in the Consumer. Downside risks to consumer spending include weak confidence in job prospects and rising unemployment, but savings1 and household wealth offer some buffer to smooth spending. We believe investment allocations to consumer-oriented companies across corporate credit and equity markets must consider both macro dynamics and bottom-up trends, including a preference for lower-priced essential offerings, a desire for experiences over goods, and a more discerning approach to luxury items.
The New Trade Order
Overview: Five months after Liberation Day, we took stock of the impact of US tariffs on the global economy. Here's what our analysis reveals:
- Defying Theory. The economic impact of recent US tariffs has been surprisingly mild and nuanced, a deviation from economic theory which posits that tariffs would reduce disposable incomes, slow consumer spending, and constrain business investment due to elevated trade policy uncertainty. Despite a significant 11% increase in the US effective tariff rate, compared to a 1.4% rise between 2017 and 2019, the global economy has demonstrated unexpected resilience. This resilience can be attributed to "front-loading" of trade and an easing of global financial conditions. Companies also appear better prepared than in previous tariff episodes, implementing diverse mitigation strategies. These include supply chain diversification, negotiating with suppliers for better terms, and focusing on cost savings, rather than simply passing on higher costs directly to consumers.
- Nuanced Country Impacts. A closer look beyond headline tariff rates reveals a varied picture of trade impacts. While US tariffs on economies like India and Brazil may appear substantial, their low trade linkages with the US and relatively closed economic structures have blunted the direct hit. Conversely, highly trade-exposed Asian economies such as Malaysia, Vietnam, Taiwan, and South Korea face headwinds, including from potential tariffs on semiconductors. Interestingly, the Euro Area's primary trade headwind isn't from the US, but from China, which is increasingly eroding Europe's global market share in high-value-added sectors like electric vehicles, machinery, and chemicals.
- EM's Policy Room to Maneuver. Encouragingly, emerging market (EM) economies, especially those in Asia like Vietnam, Taiwan, and Thailand, possess policy flexibility to absorb trade shocks. Disinflation, weaker growth, a softer dollar, high starting real rates, and contained oil prices provide ample room for EM central banks to implement monetary easing. Furthermore, many EM economies exhibit fiscal space, with countries like Indonesia, Vietnam, and South Korea maintaining debt-to-GDP ratios below 60% and fiscal deficits under 3%—a stark contrast to many Developed Market (DM) peers.
The Rise of the Retail Investor
August witnessed a resurgence of equity market volatility, coinciding with the trading activity of retail investors in so-called "meme stocks." Our quantitative investment teams have assessed the investment implications of this evolving landscape:
- Main Street's Market Muscle. Retail investors now account for ~15% of daily US equity trading volume, up from 10% before 2019. This rise, initially propelled by pandemic lockdowns and increased leisure time, has persisted, driven by the adoption of zero-commission trading. Individual investors also frequently leverage "call options"—contracts granting the right to buy a stock at a predetermined price—to gain exposure to expensive and volatile stocks. This strategy allows them to amplify potential gains with a relatively smaller capital outlay.
- Meme Stock Mechanics. While a consolidated daily dataset for retail investor activity across all platforms remains elusive, stocks with high individual investor participation can be identified through specific indicators. These include stocks and options traded in small volumes, those exhibiting certain statistical features in their high-frequency trade data, or those generating significant social media buzz (tracked via search engine popularity). This phenomenon has given rise to the term "meme stocks." When high short interest combines with intense retail activity, it can trigger rapid price surges as short-sellers are compelled to buy back shares to limit losses, further escalating prices in what is known as a "short squeeze."
- Volatility Dynamics. Retail investor trading activity significantly influences market volatility. The widespread availability of structured products and derivative-based Exchange Traded Funds (ETFs), which are largely held by retail investors, generates a substantial volume of options for sale. This selling of options can contribute to stabilizing overall market volatility. However, these products can also lead to unusual volatility patterns, such as the "spot-up, vol-up" dynamic. This occurs when both the underlying asset's price and its implied volatility increase simultaneously, which is typically counter-intuitive. This dynamic arises because hedgers, who manage the risk associated with these retail-driven products, must adjust their positions by buying the underlying asset as its price rises. This hedging activity can amplify market movements and contribute to the simultaneous rise in both price and volatility.
- Alpha's Advantage: Capitalizing on Crowd Behavior. Retail investors often make trading decisions based on factors other than fundamental analysis, frequently influenced by herd behavior. This can temporarily push stock and option prices away from their true intrinsic value. Such short-term mispricing can create valuable "alpha opportunities" for professional asset managers like us to profit from by identifying and positioning for a correction of these market dislocations.
For more, see Exchanges at Goldman Sachs: Revenue of the Meme Stocks.
The Tax Advantage
For individual investors, taxes often represent the single largest cost of investing, frequently surpassing management fees. This reality underscores the critical importance of considering after-tax returns to grow wealth.
We identify two primary levers for achieving this:
- Strategic Portfolio Positioning. Investors can strategically adjust their portfolio holdings to reduce taxes on dividends and interest. From an asset allocation perspective, tax-aware portfolios may lean towards a slightly higher allocation to equities, as US long-term capital gains tax rates are generally more favorable than those on ordinary income distributions. Within fixed income, while municipal bonds (munis) have historically been preferred for their tax-exempt interest, this preference is evolving. Munis are no longer universally valuable to taxable alternatives on an after-tax basis, even for those in the highest federal tax brackets.2 A flexible cross-asset approach, incorporating US Treasuries and corporate bonds alongside Munis, can unlock meaningful after-tax yield. Sector-wise, favoring growth and low-dividend equities can reduce taxable income leakage for higher-tax bracket investors, as can being intentional about qualified versus non-qualified dividends. Furthermore, the choice of investment vehicle is crucial: utilizing structures like ETFs which can create and redeem shares ‘in-kind’ has the potential to reduce taxable events and minimize capital gains distributions for investors.
- Harvesting Alpha from Tax Events. Beyond portfolio composition, investors can actively manage and potentially reduce taxes arising from trading activities. This involves strategic capital gains realization and tax loss harvesting. Tax loss harvesting entails realizing capital losses to offset capital gains, with any excess losses carried forward to future tax years. This strategy is particularly beneficial for high-income investors who are subject to the maximum capital gains tax rate assuming that they have capital gains outside the portfolio. Strategies like direct indexing offer substantial tax deferral benefits by allowing the realization of net losses today while building unrealized gains for the future, particularly advantageous for investors with long time horizons. These strategies may also enable realization of short-term losses to offset short-term gains while holding long-term gains.
Navigating Practicalities for Efficient Outcomes
Effective tax-efficient investing requires investor-specific consideration, reflecting individual tax brackets and chosen investment vehicles. It's also paramount that tax efficient strategies adhere to applicable IRS rules. Risk management is another critical consideration; the pursuit of tax alpha must be carefully balanced against other factors such as portfolio turnover, tracking error, liquidity, and operational complexity.
Overall, the investment landscape for individual investors is witnessing a broader shift towards a heightened focus on after-tax performance, where the ability to deliver after-tax alpha is increasingly becoming a competitive differentiator.
1The saving rate stands at 4.5% through June (vs. 3.5% at end-2024) and remains broadly in line with the level consistent with economic fundamentals (e.g., strong household balance sheets, healthy labor market). Source: Goldman Sachs Global Investment Research US Consumer Dashboard (August 20, 2025).
2For example, if a taxable bond enjoys a 6% yield and is subject to a 40% combined federal and state tax, the after-tax return of 3.6% is still more attractive than a municipal bond of similar credit quality and duration with a 3.5% yield that is fully exempt from tax.
