Market Pulse September
Global growth continues to diverge, with the US running slightly below trend while GS economists have again upgraded their forecasts for Europe, Japan, and China. Better-than-expected trade deals plus supportive monetary and fiscal policy have led GS Global Investment Research to raise its global GDP growth forecast to 2.5% in 2025 and 2.3% in 2026.
In his Jackson Hole speech, Fed Chair Powell noted that the risk between inflation and employment was shifting, warranting adjustment to the Fed's policy stance. We expect a 25bp rate cut later this month. Additionally, the FOMC released its updated monetary policy framework announcing a return to flexible inflation targeting, as expected.
The US economy is showing signs of slowdown: a softening labor market, depressed sentiment, and fiscal drag. However, financial risks remain largely in check. Outside of government debt and equity prices, most sectors look healthy relative to history. This stability has allowed markets to see through policy-induced macro volatility, and unless real evidence of recession risk emerges, we believe risk assets can continue to rise.
Source: Goldman Sachs Global Investment Research and Goldman Sachs Asset Management. As of July 1, 2025. Chart shows the relative financial risk across sectors relative to history, as measured in z-scores. Z-score refers to a standardized number of standard deviations by which the value of a raw score is above or below the average. For illustrative purposes only.
US equity valuations reflect an optimistic outlook with the market pricing an estimated 1.9% US GDP growth in 2026. This full pricing could leave the market vulnerable to material economic deterioration, further tariff price shocks, or AI disruption. While we remain constructive, we prefer focusing on high-quality companies and strategies that may help manage episodic volatility.
We see opportunity at the front-end in the US, as signs of labor market weakness have shifted the balance of risks between higher inflation and slower growth, which we believe is not yet fully reflected in market pricing (~55bp of cuts priced by YE). Similarly, we believe we could see a rally in UK gilts as a softer labor market outweighs price pressures for deeper-than-expected easing.
We expect the dollar to depreciate in the medium-term as US exceptionalism is tested and Fed cuts exert downward pressure on the currency. Dollar weakness since the start of the year and heightened FX volatility have strengthened the case for foreign investors to hedge their dollar exposure, while providing an additional tailwind for US investors allocated abroad in local FX.
Source: Price targets of major asset classes are provided by Goldman Sachs Global Investment Research. Source: “Summer data-only update.” As of August 29, 2025.
The above content is sourced from Goldman Sachs Asset Management, GIR, and MSCI. As of August 31, 2025. “We/Our” refers to Goldman Sachs Asset Management. The macro and market views expressed may differ from those of GIR and other divisions of Goldman Sachs and its affiliates. See page 3 for additional disclosures. The economic and market forecasts presented herein are for informational purposes as of the date of this document. There can be no assurance that the forecasts will be achieved. Past performance does not predict future returns and does not guarantee future results, which may vary.
Global Equities: Broadening Out and Down
Investors just watching the top of the US equity market may be missing opportunities, in our view. Global small caps have been one of the best performing asset classes this year, led by small cap stocks in developed markets outside of the US. Going forward, we see cyclical and structural tailwinds that can continue to support this trend. For example, small cap companies servicing datacenters, providing critical input materials, or deploying agentic AI may be ways to enhance exposure to innovation at more attractive prices.
Source: Bloomberg and Goldman Sachs Asset Management. As of August 20, 2025. DM Large Cap refers to the MSCI World ex-US Index. DM Small Cap refers to the S&P DM ex-US Small Cap Index. US Large Cap refers to the S&P 500 Index. US Small Cap refers to the Russell 2000 Index.
Small caps outside of the US have outperformed their large cap peers YTD on the tailwinds of upward growth revisions, central bank easing, and improved profitability. Within the US, small caps lagged to start the year but have actually outperformed since the April 8 lows as the economic outlook has improved. As the cyclical themes that can be supportive of small caps migrate to the US, we believe there may be more opportunity for equity market broadening.
Source: Bloomberg and Goldman Sachs Asset Management. As of August 14, 2025. Chart shows earnings per share (EPS) growth for calendar years 2022-2024, and the Bloomberg Consensus Estimate for EPS growth for calendar years 2025 and 2026.
Exceptional US large cap earnings growth has driven better performance in recent years. Going forward, we expect profits to expand across markets. Domestically oriented policy in the US, Europe, and Japan could support consumption effects, while tariffs may prove less of a headwind on domestic revenue streams globally. Even if these bottom-up EPS estimates are revised downward – as they historically have been – it would still represent an environment constructive for a catch-up.
Source: Bloomberg and Goldman Sachs Asset Management. As of August 14, 2025. Chart shows the average proportion of profitable versus unprofitable companies, based on earnings from the last four quarters.
Still, we believe an active investment approach is critical in small cap markets, where only half the index has historically been profitable. There are more than 2,000 companies in both the US and ex-US small cap indices, with limited analyst coverage and significant earnings dispersion. In our view, a data-driven, idiosyncratic approach is crucial for both identifying quality earnings and managing performance variability. But for the active investor, we believe there are an abundance of interesting opportunities.
“We/Our” refers to Goldman Sachs Asset Management. The economic and market forecasts presented herein are for informational purposes as of the date of this document. There is no guarantee that objectives will be met. There can be no assurance that forecasts will be achieved. Diversification does not protect an investor from market risk and does not ensure a profit. Please see additional disclosures at the end of this document. Past performance does not predict future returns and does not guarantee future results, which may vary.
