A quick read on the global market from 2026 to now: What’s rising? Why isn’t the US stock market performing? Will this trend continue?

Goldman Sachs believes the economic cycle is still early, but some targets are overpriced; they expect AI and technology stocks to fluctuate at high levels, with capital continuously flowing toward "cheap" cyclical assets. Investors should be cautious with high-valuation sectors and embrace emerging markets and old economy sectors benefiting from recovery, diversifying their portfolios to cope with future volatility and divergence.

According to Wind Chase Trading Desk, Goldman Sachs released a report on February 19 titled "Global Market Outlook: Cyclical Tailwinds, Valuation Headwinds," pointing out the core contradiction in global markets for 2026: the economic cycle is early, but the market cycle is late. This means that although macro-economic data continues to strengthen, the "high valuation" in some stock and credit markets has become a vulnerability.

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

Specifically, emerging market equities, the Australian dollar, copper, and capital goods and materials sectors in US equities have surged, while previously leading AI/large tech themes have experienced intense volatility. Goldman Sachs believes this cyclical rotation still has room to continue.

Economic Data Remains Strong: The Market Underestimates Growth Prospects

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

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

Goldman Sachs data shows that market pricing for US economic growth is still below its full-year forecast of 2.5%. This means there is room for further upward adjustments in cyclical expectations.

More importantly, besides US financial conditions easing and fiscal support, Germany's fiscal spending is boosting industrial momentum, and after the Liberal Democratic Party of Japan's landslide victory in elections, fiscal support will also be strengthened.

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

Market performance so far in 2026 presents two notable features. First, the sustained strong performance of non-US equity markets. Second, sector performance is not simply cyclical/defensive: commodities and industrial sectors are outstanding, as are cyclical sub-sectors like US homebuilders and regional banks, but consumer staples also show strong performance.

This reflects that the market is reallocating from expensive tech stocks to cheaper exposures, especially those lagging in recent years, driving "value" to outperform "growth." However, the market is also rewarding cyclical exposures benefiting from a traditional global industrial recovery, especially capital-intensive old economy sectors that have long lacked investment.

The continued underperformance of US equities can be explained from these two dimensions: US markets are expensive and more "growth"-oriented, and traditionally, their leverage to cyclical recovery is weaker than other global markets like Japan, Europe, or emerging markets.

AI Theme Encounters Turbulence: Volatility Becomes the Norm

The background of AI-related themes is becoming more challenging. Goldman Sachs believes the productivity gains from AI are real, and the macro investment story still has room to develop. But the market has already overpriced these gains, mainly concentrated in companies directly participating in the AI boom, and the focus on debt-funded capital expenditure is rising.

Although the capital expenditure forecasts for hyperscale cloud service providers are rising sharply, and new models and applications are showing increasingly powerful abilities, these good news ironically trigger negative market reactions and violent rotations in crowded positions.

The market is concerned about cash flow consumption in hyperscale cloud service providers, as well as potential disruption to software vendors and certain financial/real estate sectors.

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

Core Assets Calm, Edge Markets Riot

The intense internal rotations in equities highlight another phenomenon in 2026. For many core macro assets, such as US interest rates, major developed market indices, and key currencies, volatility remains moderate. Meanwhile, internal US market divergence is extreme, and non-US indices like Korea, as well as commodities like gold and silver, experience huge volatility.

It is noteworthy that while the current US stock index volatility is moderate, the medium/long-term implied volatility of the S&P 500 (1 year and 2 years) has continued to rise to new highs this year. Goldman Sachs believes long volatility positions, which are highly negatively correlated with equities and have good liquidity, are a solid portfolio supplement.

In credit markets, despite resilient performance in January and record issuance being well absorbed, Goldman Sachs remains cautious. Higher volatility and potential large-scale income redistribution between companies and sectors pose downside risks, and tight spreads may not provide sufficient compensation.

New and Old Dynamics of a Weak Dollar

The US dollar's devaluation continues into 2026, but the driving factors have expanded. Euro-centric trends in the first half of 2025, and a focus on carry trades in the second half, remain visible.

Meanwhile, concerns about tariffs and the Fed's independence in January fueled renewed weakness in the dollar against the euro. The underperformance of US equities relative to Europe and Japan also provides new impetus for diversification and hedging discussions.

Currencies consistent with global cyclical views—like the Australian dollar, South African rand, Chilean peso, and Brazilian real, which are at the intersection of cyclical beta, commodity exposure, and cheap valuation—are the strongest performers against the US dollar.

Additionally, multi-country FX policies are attracting more attention, especially Asian currencies whose long-term relative valuations have become very cheap.

Investment Strategy: Keep Betting on Cycles, but Choose the Cheap Ones

Goldman's view is that the market still has room for further upward revision of growth expectations. This tailwind should continue to support cyclical currencies and traditional cyclical sectors, especially those still relatively cheap in valuation. Ongoing volatility and complexity around the AI theme are likely to persist.

While the most intense market moves may still be within the main indices, they are likely to periodically spill over into index-level volatility and gradually raise the floor over time. This combination continues to support diversified equity holdings, maintaining healthy non-US exposure (including emerging markets), and long positions in index volatility with longer maturities.

Against this backdrop, core rates act more like hedging assets, especially in a moderately inflationary environment. After the recent rebound, the more likely short-term risk is yields rising again, particularly if the US labor market continues stabilizing.

For broader hedging, Goldman Sachs believes gold has further upside, as do energy prices, especially if Middle East geopolitical risks intensify again.

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The above wonderful content comes from Wind Chase Trading Desk.

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