Goldman Sachs earnings beat by $3.92, revenue topped estimates

Goldman Sachs has raised its expectations for equities and 10-year government bonds, attributing the shift to improving returns from sovereign debt following a rise in yields, as reported by the Financial Times. The investment bank's asset allocation team, under the leadership of Christian Mueller-Glissmann, shifted its three-month equity allocation from neutral to overweight, marking a departure from the stance held over the past months.

Likewise, Goldman upgraded its 12-month outlook for 10-year government bonds from neutral to overweight, aligning its longer-term allocation with equities. This transformation occurred after a surge of roughly one percentage point in government bond yields since the beginning of the year, which enhanced potential returns for investors holding sovereign debt.

Goldman attributed the higher yields, improved return asymmetry, and expectations of lower inflation to support a return to more traditional bond allocations. However, the bank retained a neutral position on government bonds over a three-month time frame, highlighting ongoing risks stemming from fiscal pressures, inflation uncertainties, and competition for capital associated with AI-related investments.

Strategists anticipate government bonds to gradually regain their role as a portfolio hedge, though they cautioned about near-term volatility and the likelihood of further yield increases.

The firm took a more bearish view on corporate credit, moving its three-month outlook to underweight, in accordance with its current 12-month position. Goldman cited widening corporate credit spreads and a reevaluation of sovereign risk in the euro area as factors contributing to the negative assessment of the asset class. The adjustments underscore a more optimistic medium-term outlook for government debt, while maintaining a cautious approach towards credit markets, as higher borrowing costs and elevated debt issuance place pressure on valuations.