Interest-rate cuts by the Federal Reserve and firm growth should extend the economic cycle and support risk assets, though the next phase may be choppier, according to Goldman Sachs Group Inc. strategists.
“Sturdy global growth coupled with non-recessionary Fed cuts should be positive for global equities, but tensions with ‘hot valuations’ may increase volatility,” strategists including Kamakshya Trivedi wrote in a note dated Thursday. Still, the setup is supportive for stocks and emerging-market assets, and mildly negative for the dollar, they added.
The new phase is also likely to come with two-sided risks: growth disappointments on the one hand, or overheating that could even revive rate-hike fears on the other, they added. That mix, they say, means investors should brace for more volatility and hedge against both scenarios.
Goldman’s team had said in October that the yen could strengthen toward 100 to the dollar over the next 10 years as Japan’s monetary policy gradually normalizes. Meanwhile, as widely expected, the Bank of Japan on Friday raised its benchmark interest rate to 0.75%, the highest in 30 years.
The strategists’ note landed just before US inflation data lifted risk sentiment, even though the figures carried some caveats from the recent government shutdown. Swaps are implying about a 20% chance of a Fed cut in January, with a reduction fully priced in by mid-2026. Traders are also still expecting the central bank to lower rates twice next year.
“In many respects, markets are well ahead of the macro — so there is a tension between ‘hot valuations’ in equity and credit markets and a macro cycle that does not quite show the imbalances and leverage typical of late cycles,” they said.
In a similar vein, they noted that there is more debate about market upside from artificial intelligence-related investments, given that “some of the imbalances that characterized the late 1990s may become a little more visible” as the AI capex boom extends.