Goldman Favors Equities Over Credit Amid Late-Cycle Risks

Goldman Sachs is maintaining its overweight position on equities over a 12-month horizon while adopting a more defensive stance tactically. The investment bank, in a recent note to investors, emphasized that late-cycle risks are mounting.

Christian Mueller-Glissmann, the strategist at Goldman Sachs, wrote that sustained earnings growth should continue to support equity outperformance against bonds and credit over the next year. However, returns are expected to slow as earnings growth and revisions peak.

The bank expects a relatively benign macro backdrop, with slowing but sturdy growth, low U.S. recession risk, moderating inflation, and limited further central bank tightening. As a result, Goldman Sachs believes that risk appetite and cyclical pricing are already elevated, making further upside more likely to require lower rates than stronger growth.

The investment bank also highlighted the importance of style diversification within equities, including low volatility and high dividend yield, alongside real assets. It continues to prefer equity over credit due to tight spreads, late-cycle releveraging, and AI-related debt issuance creating headwinds for credit while equities can still benefit from earnings growth.

Goldman Sachs also flagged near-term volatility risks from rates, seasonal weakness, U.S. midterms, and geopolitics.