Strategists at Goldman Sachs have recently pointed to two potential shifts in the risk landscape: the broadening of global growth and a reduction in inflation fears.
According to their analysis, the first has occurred, with global growth expanding over the last few months, enhancing the performance of equity markets and cyclical assets.
However, the second shift—easing inflation fears—is yet to materialize.
Inflation remains strong in the US, adding upward pressure on US interest rates due to steady growth.
Over the past few months, the broadening of the global growth impulse initially promoted a wider spread in equity market performance and cyclical asset gains, Goldman notes.
But while this trend has contributed to increased yields, it has concurrently acted to restrain the strength of the US dollar.
“As the focus has turned to stickier US inflation—and tighter “real” policy—this has provided the first real challenge to equity markets in nearly 6 months, while also accentuating US “exceptionalism” and finally igniting “divergence” themes between the US and other major economies,” the strategists at Goldman Sachs said in a note.
With geopolitical risks in the spotlight, the strategists acknowledged that the complexity of the current risk environment has increased.
Despite this, Goldman maintains a view that the anticipated inflation relief “has likely been delayed not destroyed.”
For that reason, strategists expect a more constructive equity backdrop to reemerge gradually over time.
“But even after a sizable rates market adjustment, we think the market is still vulnerable to the risk that further sticky inflation news alongside a strong US economy leads markets to lose confidence in an extended easing cycle,” they noted.
“And we think near-term catalysts to calm those fears are not yet clear,” the strategists added.
As a result, while Goldman sees a potential opportunity to adopt a more aggressive stance on equities in the coming weeks, they remain cautious about engaging in rate markets from a long position due to the strong nominal growth.
“We continue to expect wider US rate spreads against other DM economies and to like the protection offered by USD upside,” strategists noted.