Goldman Sachs has issued a cautionary outlook for global equity markets in 2026, citing elevated risks from inflation persistence, shifting monetary policy, and geopolitical tensions. The firm forecasts a 12% correction in major indices if current trends continue.
- S&P 500 could decline 12% by end of 2026 under current trends
- Core PCE inflation projected above 3.5% through H1 2026
- U.S. federal deficit forecast at $2.1 trillion in FY2026
- Nasdaq-100 shows 28% correlation to real yields since Q3 2025
- 10-year Treasury yield increase of 100 bps could trigger 14% tech sell-off
- Recommendation to allocate 10% of portfolio to cash and boost defensive sectors
Goldman Sachs has raised its alert level for global equities, projecting a potential 12% decline in the S&P 500 and a 15% drop in the MSCI World Index by the end of 2026. This revision follows a reassessment of inflation dynamics, with core PCE inflation expected to remain above 3.5% through the first half of 2026, delaying rate cuts by 6–9 months beyond previous expectations. The firm’s updated model incorporates tighter fiscal constraints in the U.S., where the federal deficit is projected to reach $2.1 trillion in fiscal year 2026, up from $1.7 trillion in 2024. This fiscal pressure, combined with a 4.2% real interest rate environment, increases the risk of a 'higher for longer' policy regime. Equity valuations, currently at 20.3x forward P/E for the S&P 500, are flagged as vulnerable to downward revision if earnings growth fails to exceed 5% annually. A key driver of the warning is the heightened sensitivity of tech-heavy indices, particularly the Nasdaq-100, which has shown a 28% correlation to real yields since Q3 2025. A 100-basis-point rise in 10-year Treasury yields—projected under a 'sticky inflation' scenario—could trigger a 14% sell-off in the sector. Meanwhile, European equities face added stress from energy volatility, with gas prices in the EU forecast to average €125/MWh in Q1 2026, up 22% from current levels. Investors across institutional and retail segments are being advised to reduce exposure to high-valuation growth stocks and increase allocations to defensive sectors such as utilities and consumer staples. The firm recommends maintaining a 10% cash buffer and adjusting equity weightings based on quarterly macroeconomic data revisions.