Goldman Sachs: Don't Wait for the Midterm ElectionsA "Goldilocks" Rally May Ignite the Year-End U.S. Stock Market Ahead of Schedule

Goldman Sachs Partner Mark Wilson recently pointed out that global stock markets are facing increasingly clear upside opportunities before the end of the year. The market has currently fully priced in stagflation risks, and as a more moderate "Goldilocks" economic scenario gradually emerges, investors do not need to wait for the U.S. midterm elections to conclude before returning to the market to participate in risk asset investments. Recent market price action is corroborating this optimistic expectation, with AI-driven "fear of missing out" (FOMO) having returned to the market. After Meta released its Muse product, market expectations for the timeline of AI's large-scale adoption by consumers accelerated significantly, driving AI-themed assets such as the Nasdaq index to achieve a strong upward breakout on Monday of this week, following three months of consolidation and position reduction after the historic rally in the second quarter. At the same time, U.S. bond yields have risen again. Unlike the previous competition for funds triggered by government and AI capital expenditures, or inflationary pressures caused by energy prices, this round of yield increases is mainly supported by data such as stronger-than-expected Purchasing Managers' Index (PMI) readings, reflecting the continued strength of U.S. nominal economic growth, and the stock market has managed to withstand pressure and maintain its gains despite significant yield volatility. The market is currently widely concerned that the seven-month consecutive rise in U.S. ten-year Treasury yields (the longest streak in fifty years) will ultimately drag down the stock market, and investors tend to prefer to wait until the Gulf situation cools down and the midterm elections pass safely before increasing risk exposure again. However, Goldman Sachs' analysis breaks this consensus, pointing out that substantive improvements in the three major fundamentals of inflation, economic growth, and corporate earnings are providing a solid foundation for a year-end stock market rally. Easing Inflationary Pressures and the Deflationary Effects of AI Over the past period, due to the impact of the Iran conflict, rising energy prices masked the downward trend in core inflation. But Goldman Sachs points out that tariff pass-through effects are currently weakening, and rate hikes along with the resulting tightening of financial conditions have produced real effects. If logistics flows through the Strait of Hormuz return to normal, energy prices will face significant downside risks, especially considering that Iran's maximum negotiating leverage window is expected to end around November 2, and a new deflationary energy narrative could emerge at any time. More importantly, Meta's Muse product has fired the "first shot" of deflation in the consumer goods and services sector. Goldman Sachs' research on the "era of commercial agentic AI" indicates that technological progress is substantially reducing costs on the consumer end, which will become a more important deflationary DRIVE than falling energy prices. Cooling Economic Growth Expectations Limit Central Bank Hawkishness Despite geopolitical and energy price uncertainties over the past six months, U.S. economic activity has continued to demonstrate resilience beyond expectations. However, research by Goldman Sachs economist Jan Hatzius shows that this upside risk is diminishing, and the second derivative of economic growth will begin to slow. As fiscal dividends such as tax cuts fade, rising gasoline prices and mortgage rates will impact certain sectors of the economy and consumers. In addition, although the capital expenditure cycle in the AI sector will continue, its growth rate will also slow. Combined with expectations of falling inflation, the future pace of rate hikes by central banks is highly likely to be lower than current market pricing. Mark Wilson emphasized that now is not the time to worry about rising yields; such concerns were only reasonable seven months ago. Core Earnings Remain Strong, Fundamentals Support Stock Market Valuations Regarding the current intense debate in the market about the sustainability of corporate earnings and "earnings bubbles," Ben Snider, head of Goldman Sachs' U.S. strategy team, believes that some companies currently exhibit "excess earnings" phenomena, but overall no earnings bubble has formed. Goldman Sachs reminds investors to note three facts: First, investors should not pay a high premium for record-breaking "other income"; second, memory chip and certain semiconductor stocks are indeed currently in a state of excess earnings; third, at least until the end of 2027, even if growth slows, corporate core earnings are highly likely to remain particularly strong, providing fundamental support for stock market valuations. Stagflation Narrative Collapses, "Goldilocks" Reshapes Market Landscape The market had previously been trying to price in a significant slowdown in economic growth CKH HOLDINGS earnings as well as higher interest rates, but macroeconomic data does not support this perfect "stagflation" narrative. On the contrary, slowing growth, diminishing inflation threats, a softening central bank stance, and a year of valuation downgrades together constitute a favorable market combination. Goldman Sachs believes that the current situation is remarkably similar to the bull-bear tug-of-war during the major technological transformation period of the mid-to-late 1990s. If the market ultimately ushers in a "Goldilocks" scenario (i.e., economic growth that is just rightneither too hot to trigger inflation nor too cold to cause recession), then the historical pattern of a year-end stock market rally after midterm elections still applies. Mark Wilson concluded that investors should not wait for the midterm elections to end before taking action, and as the energy price threat fades, European and UK stock markets are also well-positioned to participate in this rally. This article is reprinted from "Wall Street Insights," author: Ye Zhen; GMTEight editor: Liu Jiayin.