Goldman Sachs Favors Equities Over Credit Amid Late-Cycle Risks

Goldman Sachs maintains its overweight stance on equities over a 12-month horizon while becoming more defensive in its investment strategy, according to a note sent to investors. The bank's strategist, Christian Mueller-Glissmann, stated that the firm remains tactically neutral across assets for three months and modestly pro-risk for one year, favoring stocks over credit as late-cycle risks rise.

Goldman believes sustained earnings growth will support equity outperformance against bonds and credit in the next year. However, returns are likely to slow down due to peaking earnings growth and revisions. The bank expects a benign macro backdrop with slowing but steady growth, low U.S. recession risk, moderating inflation, and limited further central bank tightening.

The firm noted that bond markets have become a 'speed limit' for equities due to fiscal concerns, competition from AI investment, and sticky inflation, reducing central banks' ability to ease. As a result, Goldman recommends more style diversification within equities, including low volatility and high dividend yield stocks, alongside real assets.