Goldman Sachs told clients it continues to favor equities on a 12-month horizon, even as it cautioned that the strong, narrow advance in stocks is likely to slow. In a client note, analyst Christian Mueller-Glissmann said markets have largely recovered from the immediate shock of the Middle East conflict and that equity indices are trading near all-time highs reached since mid-April.
Goldman attributes the rally to solid technology-sector earnings and a surge in AI-related capital expenditure. At the same time, the firm highlighted persistent headwinds from elevated bond yields and higher energy prices, which could limit broader gains.
Goldman’s Risk Appetite Indicator (RAI) has climbed above 1.2, marking its strongest reading since 2021. The firm warned that such elevated sentiment levels raise the probability of market corrections, especially given concentrated positioning in global technology stocks.
"Very high RAI levels are not necessarily a bearish signal - near-term average returns and hit ratios for positive returns are somewhat lower and risk of corrections tends to pick up," Mueller-Glissmann wrote. The note underscores that while high RAI readings do not guarantee a downturn, they do coincide with heightened vulnerability to pullbacks.
Goldman identified several near-term downside scenarios that could increase market stress. A renewed escalation in the Middle East or continued closure of the Strait of Hormuz could sustain upward pressure on oil prices and on yields, the bank said. Conversely, the firm’s baseline assumes inflation normalizes and the strait reopens, which would help to ease those pressures and could support a more favorable macro backdrop.
Reflecting its outlook, Goldman said: "After the sharp but narrow rally and with our Risk Appetite Indicator (RAI) back above 1, equity returns should moderate and there is more risk of corrections." Despite that, the firm remains overweight equities over a 12-month horizon and advises clients to "look to buy any dips in the coming months," citing continued positive earnings growth supported by AI capex.
To manage the greater risk environment, Goldman recommended selective risk-mitigation approaches. The bank suggested instruments and strategies such as put spread collars and factor diversification, and it noted a preference for long-dated call options as a way to manage equity exposure without fully forgoing upside participation.
Market data snippets referenced in the client material included: indicators for oil and yields were displayed alongside the commentary, reflecting moves in crude benchmarks and the 10-year U.S. Treasury yield.