Goldman Sachs strategists, led by Peter Oppenheimer, flagged an increased chance of a near-term equity correction in a Wednesday note, citing the combined effects of heightened geopolitical uncertainty and growing anxiety around AI-related capital spending and disruption.
"Rising geopolitical uncertainty and growing anxiety about the impact of AI capex and disruption are, in combination, a significant headwind for risk assets to absorb in the short term," the strategists wrote.
The bank highlighted that the recent equity rally since the pandemic lows - especially pronounced in U.S. markets - has left near-term risks more elevated. That rally, coming off a period of unusually strong gains, has been followed by a broadening of market gains beyond the United States.
Valuations are an important concern for the strategists. While the U.S. market has long traded at elevated multiples because of strong profit growth and high returns on equity, the recent expansion of gains into other regions has driven valuations above their respective longer-term histories across the globe. In Goldman’s view, this leaves markets with less margin for error.
Another structural change the strategists point to is a sharp compression in equity risk premia, which they say are "mostly back to levels seen in the run-up to the financial crisis." With risk premia at these levels, markets become more vulnerable to shocks tied to technology competition or to shifts in the growth and inflation outlook. The firm noted that such shocks might be intensified by developments in the Middle East.
Beneath headline indexes, Goldman flagged substantial rotations within the market. Concerns about technology valuations and large planned capital expenditures have prompted investors to move away from longer-duration technology names toward firms linked to physical investment and infrastructure. The strategists described this as producing "one of the weakest periods of relative returns for technology compared with other sectors over the past 50 years."
This reallocation has coincided with a broader rotation from growth stocks into value, narrowing valuation gaps across sectors. That narrowing, the strategists argue, leaves major indexes more sensitive to macro risks such as disruptions to energy supply and tighter financial conditions.
Despite the combination of elevated valuations, compressed risk premia and shifting investor preferences, Goldman does not expect a deep or prolonged market downturn. "The depth and extent of any correction are likely to be limited, in our view, with relatively low risk that it morphs into a bear market," the strategists said.
Goldman cites several cushioning factors: resilient economic growth, solid earnings momentum and healthy private-sector balance sheets. Historically, the firm notes, geopolitical shocks have tended to produce relatively short-lived equity declines; they observe that the median equity correction around such events has been about 6% over roughly 18 days.
Given the elevated probability of a pullback tied to stretched valuations, the strategists suggest that any correction could create buying opportunities for investors. They continue to recommend diversification across geographies, factors and sectors as a means of improving risk-adjusted returns, stressing that a broad approach may help manage the sensitivity of portfolios to the macro risks they identified.
Overall, the note frames the current episode as one of elevated short-term vulnerability rather than the start of a sustained bear market, with market structure and macro fundamentals pointing to limited downside in Goldman's assessment.