Rates Rise, But Goldman Sees Equities Supported by Strong Growth
Goldman Sachs Partner Mark Wilson argues that the recent rise in interest rates should be viewed against the backdrop of what has already happened, rather than extrapolating forward. The US Treasury market has seen a historic drawdown in bond returns, with the five-year return on a 10-year US nominal Treasury being the worst in over 120 years.
Markets are pricing more interest rate hikes than Goldman expects to be delivered, and the inflation surprise distribution may now be shifting lower. Despite this, Wilson believes that strong nominal growth and AI investment continue to support the earnings outlook for equities.
The impact of higher borrowing costs on governments is becoming more important, but Wilson sees the direct effect on private sector financials as relatively small. He also notes that the next debate in the equity market may shift from whether AI investment continues to who ultimately earns the return on that capital, with potential implications for market breadth and stock selection.