A comprehensive understanding of the global market from 2026 to the present: What is rising? Why are U.S. stocks struggling? Will this trend continue?

Goldman Sachs believes that the economic cycle is still early, but the market valuations of some targets are too high. It is expected that AI and technology stocks will experience high-level fluctuations, while funds will continue to flow into "cheap" cyclical assets. Investors should be wary of overvalued sectors and embrace emerging markets and old economy sectors that benefit from recovery, in order to diversify their allocations to cope with future volatility and differentiation.

According to the Wind Trading Desk, Goldman Sachs released a report on February 19 titled "Global Market Outlook: Cyclical Tailwinds, Valuation Headwinds," pointing out the core contradiction in the global market by 2026: the economic cycle is still early, but the market cycle is already late. This means that although macroeconomic data continues to strengthen, the "high valuations" of some stocks and credit markets have become a vulnerability.

For investors, this creates a clear investment direction: embrace cyclical assets that benefit from economic recovery but are still cheap in valuation, while being cautious of AI and large technology stocks that have already seen significant increases.

Specifically, emerging market stocks, the Australian dollar, copper, and the capital goods and materials sectors in the U.S. stock market have risen sharply, while the previously leading AI/large technology themes have encountered severe fluctuations. Goldman Sachs believes that there is still room for this cyclical rotation to continue.

Economic Data Remains Strong: The Market Underestimates Growth Prospects

Growth data continues to support the performance of cyclical assets. The U.S. ISM index has been rising steadily over the past few months, with the surprise index turning positive, and the labor market is stabilizing.

Globally, the manufacturing PMI for developed markets reached its highest level in the past year in January, and the manufacturing PMI for emerging markets also rose month-on-month.

Goldman Sachs data shows that the market's pricing of U.S. economic growth is still below its annual forecast of 2.5%. This means there is still room for the market to further raise cyclical expectations.

More importantly, in addition to the easing of U.S. financial conditions and fiscal support, Germany's fiscal spending is driving a rebound in German industrial momentum, while Japan's Liberal Democratic Party will strengthen fiscal support after winning a decisive victory in the elections.

Not Just Cycles: The "Physical Return" of Old Economy Assets

The market performance from 2026 to the present has shown two prominent characteristics. First, the continued strong performance of non-U.S. stock markets. Second, industry performance is not simply a cyclical/defensive differentiation: commodities and industrial sectors have performed well, as have cyclical sub-sectors like U.S. home builders and regional banks, while consumer staples have also shown strong performance.

This reflects that the market is reallocating from expensive technology stocks to cheaper exposures, particularly in areas that have lagged in recent years, driving "value" to outperform "growth." However, the market is also rewarding cyclical exposures that benefit from the traditional global industrial recovery, particularly in capital-intensive old economy sectors that have long lacked capital investment.

The continued underperformance of U.S. stocks can be understood from these two dimensions: the U.S. market is expensive, has a heavier "growth" attribute, and traditionally has less leverage to cyclical recovery compared to other global stock markets like Japan, Europe, or emerging markets.

AI Themes Encounter Turbulence: Volatility Becomes the Norm

The background of AI-related themes has become more challenging. Goldman Sachs believes that the productivity gains brought by AI are real, and there is still room for macro investment stories to develop. However, the market has already priced these gains too high, mainly focusing on companies directly involved in the AI boom, while attention is rising on the debt financing capital expenditure boom.

Although the capital expenditure forecasts for hyperscale cloud service providers have risen significantly, and new models and applications are showing increasingly powerful capabilities, this good news has triggered negative market reactions and severe rotations of crowded positions.

The market is concerned about the cash flow consumption of hyperscale cloud service providers and the potential disruption to software providers and certain financial/real estate sectors.

Goldman Sachs points out that there is extreme differentiation within AI-related sectors. Considering the speed of innovation, the scale of investment, and the value already accumulated in AI-related tech stocks, the volatility of the AI theme will persist in the long term.

Core assets calm, fringe markets in turmoil

The severe rotations within the stock market highlight another phenomenon emerging in 2026. For many core macro assets, such as U.S. interest rates, major developed market stock indices, and major currencies, volatility remains moderate. However, at the same time, there is extreme differentiation within the U.S. stock market, with non-U.S. indices like South Korea and commodities like gold and silver experiencing significant volatility.

Notably, although the current volatility of U.S. stock indices is moderate, the implied volatility of the S&P 500 for longer terms (1 year and 2 years) has continued to rise to new highs year-to-date. Goldman Sachs believes that long volatility positions that are highly negatively correlated with stocks and have good liquidity are a good portfolio complement.

In the credit market, despite a resilient performance in January and record issuances being well absorbed, Goldman Sachs remains cautious on credit. Higher volatility and potential large-scale income redistribution between companies and industries pose downside risks, while tight spreads may not provide sufficient compensation.

New and old drivers of a weak dollar

The depreciation of the dollar continues into 2026, but the driving factors have expanded. The euro-centric trends in the first half of 2025 and the focus on spread trading in the second half are still evident.

Meanwhile, in January, concerns over tariffs and the independence of the Federal Reserve re-emerged, leading to a weakening of the dollar against the euro. The poor performance of U.S. stocks relative to Europe and Japan has also provided new momentum for diversification and hedging discussions.

Currencies that align with global cyclical views, positioned at the intersection of cyclical beta, commodity exposure, and cheap valuations, such as the Australian dollar, South African rand, Chilean peso, and Brazilian real, have become the currencies with the largest gains against the dollar.

Additionally, the foreign exchange policies of multiple countries are receiving more attention, especially Asian currencies that have become very cheap relative to long-term valuations.

Investment strategy: Continue to bet on cycles, but choose cheap ones

Goldman Sachs' view is that there is still room for the market to further raise growth expectations. This tailwind should continue to support cyclical currencies and traditional cyclical sectors, particularly those areas that remain relatively cheap in valuation. The increasing volatility and complexity surrounding the AI theme are likely to persist Although the most intense market movements may still be within the major indices, they are likely to periodically spill over into index-level volatility, raising the bottom over time. This combination still supports diversified equity positions, maintaining healthy non-US exposure (including emerging markets), and long positions in longer-term index volatility.

In this context, core rates act more like a hedge asset, especially in a backdrop of moderate inflation. After a recent rebound, the more likely risk in the short term is that yields will rise again, particularly if the U.S. labor market continues to stabilize.

In terms of broader hedging, Goldman Sachs believes that gold has further upside potential, as do energy prices, especially if geopolitical risks in the Middle East heat up again.