Global equities to rely on earnings growth as investor risk appetite weakens: Goldman Sachs

According to a report by Goldman Sachs, global equities are likely to rely on corporate earnings growth for support, as investor risk appetite weakens and uncertainty looms over AI investments and geopolitical situations. Despite these concerns, the investment bank maintains an overweight stance on global equities for both three-month and 12-month periods, suggesting that markets will likely remain stable towards the end of the year despite potential short-term volatility.

Goldman Sachs' Risk Appetite Indicator (RAI) and sentiment indicators both fell to their lowest levels since April 2025, indicating a decrease in investors' willingness to take risks. The report highlights that lighter investor positioning and lower valuations could potentially improve the risk balance for equity markets, although it has not yet reached levels historically linked to stronger subsequent returns.

The shift in market leadership is evident, with defensive and value-oriented stocks outperforming companies more closely tied to the AI investment cycle. However, semiconductor stocks have underperformed large technology companies as investors evaluate whether substantial expenditures on AI infrastructure will yield adequate returns.

Easing tensions in the Middle East have led to a more than 16% drop in Brent crude prices, while US equity markets experienced a sharp sell-off, with the Nasdaq Volatility Index recording one of its largest weekly swings since March 2020. Goldman Sachs anticipates that easing concerns over AI investments and tangible evidence of returns from such investments could bolster investor confidence.

Additionally, lower energy prices and the possibility of reduced interest rate pressures may further bolster market stability. The bank also upholds an overweight position on bonds, particularly longer-duration government securities, as higher yields and a gradual slowdown in nominal economic growth could provide a buffer against volatility in equity markets.

Despite ongoing uncertainty regarding AI investments and geopolitical developments, Goldman Sachs maintains that earnings growth and relatively attractive valuations will continue to play a crucial role in supporting global equities.