"Reflation" becomes a new core narrative! Goldman Sachs: Global asset allocation needs to be adjusted, leaning towards growth pricing

Since early September, global market sentiment has significantly improved. The performance of the US non-farm payrolls in September exceeded expectations, coupled with the aggressive measures taken by the People's Bank of China, the outlook for the global economy is becoming clearer, and stock markets in China, Europe, and the United States have surged together.

However, as we entered October, the US CPI in September exceeded expectations across the board, and oil prices have rebounded recently, shifting the market focus back to inflation. A recent report by Goldman Sachs pointed out that with subtle changes in investor sentiment, the core narrative of the global market is shifting from the "golden-haired girl" economy to "reinflation."

On Monday local time, Goldman Sachs analyst team led by Andrea Ferrario released a report:

Since early September, the overall market sentiment has become more optimistic, and our risk appetite indicator showed a significant positive change last week, driven by a repricing of bullish expectations for growth. In September, the monetary policy factor PC2 rose in sync with the global growth factor PC1, reflecting the market's expectations for the "golden-haired girl" economic environment.

However, starting from early October, PC2 has declined, pricing closer to the "reinflation" environment. We expect the market to continue fluctuating between the "golden-haired girl" and "reinflation" economic environments by the end of this year.

Goldman Sachs believes that in the "reinflation" environment, the market may prefer assets that benefit from economic recovery and rising inflation. Goldman Sachs holds an optimistic view on the returns of risk assets in the next year, adjusting its stock and credit ratings from neutral to overweight for the next three months.

Growth Expectations Drive Asset Upside

The repricing of economic growth is also intuitively reflected in market trends. The Goldman Sachs report pointed out that in the past few months, there have been significant changes in the global market's reaction to macroeconomic data:

In the first half of this year, "bad news" about the economy was interpreted by the market as "good news" for the Fed rate cuts. However, by summer, the market's reaction to "bad news" became more real and direct, where "bad news" remained "bad news."

Recently, "good news" is seen as "good news" for growth pricing, but not so obvious for policy pricing, as investors expect reduced risks of economic recession and have concerns about accelerating inflation.

In fact, the market has significantly reduced the likelihood of rapid Fed rate cuts, and the expected pace of rate cuts is aligning with other central banks globally.

Currently, Goldman Sachs believes that growth expectations have become a more important driver of cross-asset returns.

In the "Reinflation" Environment, Goldman Sachs Favors Stocks and Credit

The Goldman Sachs report pointed out that as the core narrative shifts from the "golden-haired girl" economy to "reinflation," the performance of different asset classes has also changed.

Specifically, in the "golden-haired girl" environment, the market typically prefers stable growth and low-risk assets, while in the "reinflation" environment, the market may favor assets that benefit from economic recovery and rising inflation.

Using the performance of global assets in the past two months as an example, the Goldman Sachs report stated:

In September, cyclical stocks in Europe and Japan showed a more significant increase relative to defensive stocks, but cyclical stocks in the US had a stronger increase compared to defensive stocks this month In the second half of September, assets influenced by China, such as Chinese stocks and copper, performed the strongest in terms of standard deviation returns. Broad stock indices and credit spreads also showed relatively strong returns.

However, since early October, the revaluation led by inflation breakevens and oil has taken the lead in the pro-cyclical repricing—our interest rate team believes that long-term US inflation bulls may serve as potential hedging tools against tariff risks. The US dollar has also strengthened against both cyclical and "safe haven" currencies.

Goldman Sachs is optimistic about the return of risk assets in the next year, adjusting its stock and credit ratings from neutral to overweight for the next three months. At the same time, due to potential market volatility, Goldman Sachs believes that hedging should be done selectively.

Despite being in the late stage of the economic cycle, which typically implies a slowdown in growth, Goldman Sachs believes that the stock market still has the potential to achieve good investment returns through company profit growth, valuation uplift, and some structural growth opportunities. In contrast, the returns on credit assets may be relatively limited