Goldman Sachs strategists have flagged a potential stall in equity markets over the coming quarter, citing elevated valuations and a weakening macroeconomic backdrop that may lead to increased downside risk. While the investment bank retains a constructive 12-month outlook, it is neutral over a 3-month horizon, according to a note led by Christian Mueller-Glissmann.
Goldman’s proprietary equity tail-risk framework suggests a greater likelihood of a drawdown than a major rally in the near term. Key factors driving this caution include:
Stretched valuations in U.S. equities, particularly the “Magnificent 7”
Weakening leading indicators globally
Narrow market breadth despite easing financial conditions
Tariff-related uncertainty and late-cycle inflation risks
While markets have recently benefited from strong AI-led optimism and improving sentiment, Goldman warns that this bullishness could “act as a speed limit” on further gains.
The strategists describe the current environment as a fragile “Goldilocks” scenario — characterized by moderate growth and cooling inflation. However, they caution that this equilibrium is vulnerable to:
A negative growth shock
A sharp rate increase (rate shock)
A deepening U.S. dollar bear market
If macro data deteriorates or inflation pressures reignite, Goldman predicts a renewed “risk-off” rotation in global markets.
To guard against short-term risks, Goldman recommends:
Long-volatility and skewed option strategies
Credit protection trades
Upside exposure to Chinese equities
Dollar downside plays, especially if U.S. policy uncertainty grows
To monitor current market health and position defensively, use:
Offers valuation indicators (P/E, P/B, EV/EBITDA) for U.S. equities to assess where valuations may be stretched.
Track real-time volume leaders to identify crowded trades and potential reversal zones in highly positioned stocks.
Goldman Sachs’ mid-year caution suggests investors should brace for volatility and asymmetric risks. While long-term trends like AI adoption and monetary easing remain bullish, the near-term setup is fragile. Prudent hedging, risk management, and valuation discipline will likely define outperformance in the second half of 2025.
