Goldman Sachs assesses that global equities have entered the 'optimistic phase' of a bull market, with earnings expected to continue supporting the rally through 2026. Including dividends, the total return is projected to reach 15%. The market is transitioning from valuation recovery to earnings-driven growth, and geographic diversification is beginning to take effect. Strategically, emphasis is placed on staying invested, enhancing diversified allocations, while remaining cautious about tech concentration, macro slowdowns, and credit risks.
Goldman Sachs' equity strategy team noted in its latest outlook report that global equities are in a typical 'optimism phase,' with the breadth of the bull market expected to expand further by 2026. The strategy team, led by Peter Oppenheimer, maintains a constructive view on the equity market. Although they anticipate that the returns of major indices in 2026 will be lower than in 2025, earnings growth will continue to support market performance.
According to Goldman Sachs' forecasting model, the weighted price return for global equities in 2026 is projected to be 13% in dollar terms, and total returns including dividends are expected to reach 15%. This forecast builds on the strong market performance of 2025. Looking back over the past year, although the market did not rise in a straight line, and at the beginning of the year concerns about spillover effects from the technology sector triggered by 'DeepSeek' and tariff worries caused the Nasdaq index to fall nearly 25%, the market subsequently experienced a sharp rebound. Since the low point in April, the two major U.S. indices have rebounded by nearly 45%.
Goldman Sachs emphasized that the current bull market is transitioning from pure valuation recovery to earnings-driven growth, and market performance has begun to exhibit geographic diversification, with most major equity markets outperforming U.S. equities in 2025. This marks the first time in years that investors have genuinely benefited from geographically diversified allocations. Additionally, the robust performance of cyclical stocks relative to defensive stocks, along with better-than-expected economic data, has further boosted growth expectations.
However, Goldman Sachs also warned that given the record concentration still present at the country, sector, and individual stock levels, diversification in 2026 is particularly urgent. Strategists recommend that investors optimize risk-adjusted returns through cross-regional, cross-style, and cross-sector allocation while remaining invested, and remain vigilant against potential credit risks and tech stock correction pressures.
Cycle Evolution: Entering the 'Optimism Phase'
Based on over 50 years of research into U.S. equity cycles, Goldman Sachs pointed out that equity markets typically go through four phases of evolution: Despair, Hope, Growth, and Optimism. The market is currently in the final part of the cycle—the 'Optimism Phase.'
This phase is characterized by increased investor confidence, and even the potential emergence of complacency, with valuations often rising again and surpassing earnings growth. The report noted that while 2025 was the early stage of the optimism phase, with many non-U.S. markets seeing their valuations rise as earnings recovered, Goldman Sachs believes this phase will continue into 2026.
Notably, historical bubbles often see more dramatic stock price surges in the final year. Goldman Sachs reminded that if speculative behavior increases under the influence of AI narratives, there is an upward risk of further 'melt-up' and bubble-like characteristics in the market by 2026.
Looking back at the year that is about to end, Goldman Sachs pointed out that the path to recovery was fraught with volatility. In early 2025, the S&P 500 index underperformed and experienced a pullback of just below 20% between mid-February and April, with the Nasdaq index falling even further. The report specifically mentioned that tariff concerns and the spillover effects on the U.S. tech industry following the launch of 'DeepSeek' were key factors leading to the market decline at the time.
However, the subsequent recovery was significant. As tariff concerns receded, especially with strong earnings results from U.S. mega-cap tech stocks, the market regained momentum. Unlike the past decade when performance was primarily driven by the U.S. and growth stocks, geographically diversified strategies began to take effect in 2025, particularly with lower-valued non-U.S. markets starting to outperform.
Investment Strategy: Diversification Is the Top Priority
Looking ahead to 2026, Goldman Sachs’ core recommendation is “diversification is a must.” Given that the current stock market is geographically dominated by the United States, sector-wise led by technology, and concentrated in U.S. mega-cap companies, this high level of concentration serves as both a driver and a risk.
Goldman Sachs advises investors to adopt the following strategies:
Stay invested: The bull market has not yet ended.
Diversify across regions: Increase focus on emerging markets (EM).
Diversify across styles: Combine carefully selected growth stocks with value stocks. Outside the U.S., value stocks typically outperform growth stocks, partly due to sectors like finance and mining successfully transitioning from “value traps” to value creators.
Diversify across sectors: Leverage the expansion of technology capital expenditures (Capex) and position in “old economy” infrastructure sectors that can benefit from AI development.
Focus on Alpha returns: Capitalize on the potential for low stock correlations to capture individual stock opportunities.
Potential Risks: Macroeconomic and Credit Concerns
While the baseline forecast remains optimistic, Goldman Sachs has outlined several key downside risks. The first is weak economic growth, with rising unemployment potentially triggering market corrections. Considering the current high valuations and strong performance of cyclical sectors, this risk is particularly relevant.
Secondly, there is the risk of concentration in technology stocks. If quarterly earnings of technology stocks disappoint or competition intensifies, it may trigger a pullback in leading technology stocks. Given their significant weight in the index, this could be sufficient to spark a broader market correction.
Finally, debt risks cannot be overlooked. The report highlights that risks in the credit market are rising as technology companies increase debt issuance. The failures of Tricolor and First Brands have heightened market attention on potential risks. Additionally, concerns over public finances could push up government bond yields. Nonetheless, Goldman Sachs believes that the relatively healthy balance sheets of the private sector and banks, combined with the possibility of more rate cuts than currently priced in by the market, will somewhat limit the secondary effects of economic downturns.
Editor/jayden