Rate cut expectations postponed again; Goldman Sachs: AI-driven productivity improvement is currently the most crucial macro variable.

Long-term interest rates have broken through key resistance levels, inflation expectations are rising again, momentum indicators have reached extreme levels not seen since 2000, and overall market breadth has narrowed significantly—multiple signals are prompting some US stock investors to become more cautious.

Faced with these market concerns, Goldman Sachs does not shy away from macro pressures—the bank’s latest outlook has postponed the timing of rate cuts for this year. However, Goldman also states that the key variable supporting the market right now is not the path of short-term interest rates, but productivity gains driven by artificial intelligence and the resulting reconstruction of long-term profit expectations.

Goldman Sachs Chief Economist Jan Hatzius points out in the latest monthly report that the growth rate of US labor productivity has risen from the pre-pandemic long-term trend of about 1.5% to 2.1%. He expects that as AI technology accelerates its penetration across industries, this upward trend is likely to persist.

Goldman Sachs Partner Mark Wilson says that although the recent rise in long-term Treasury yields and the delay in rate-cut expectations have brought some pressure to the market, over a longer cycle, productivity improvements driven by AI and the boost to corporate profit outlook remain the most crucial macro variables determining the direction of the stock market. Despite the astonishing gains in semiconductor and AI-related sectors, the market as a whole has not truly entered the stage of irrational exuberance yet.

Rate Cuts Delayed, AI Supports the Market

Goldman Sachs has postponed expectations for further rate cuts, now forecasting the Federal Reserve’s first rate cut may happen in December this year, with the second possibly delayed until March next year.

Meanwhile, rising energy prices, tightening supply of memory chips, combined with expanding global fiscal spending, are driving upward yields on US and global long-term government bonds. US 10-year Treasury yields are once again approaching critical resistance, and yields on UK and German bonds are also climbing.

From the traditional logic, rising interest rates usually suppress high-valuation growth stocks. However, the market has not shown significant shake-ups. Semiconductor and other tech stocks, having surged in April, are still holding at high levels, and space concept stocks even saw near double-digit gains.

The key reason the market is able to withstand higher rates is that investors’ expectations for future profits are being repriced. The core driver of this revaluation is the productivity transformation brought about by AI.

Long-Term Profit Revaluation, AI Is More Than a Concept

Goldman Sachs Chief Economist Jan Hatzius points out that about 75% of the fundamental value in current US stock valuations comes from profits and dividends projected ten years or even further into the future. Therefore, as long as AI continues to drive productivity improvements, long-term corporate profit growth expectations are likely to be revised upwards, providing effective support for valuations.

Goldman Sachs Partner Mark Wilson provides historical evidence. He revisits Amazon’s 29th anniversary as a listed company: After adjusting for splits, the 1997 IPO price was only $0.075, and as of last Friday’s closing, the cumulative increase was more than 3500 times. The internet era was marked by massive capital misallocation and failed projects, but the returns generated by a few long-term winners were enough to cover most investment losses.

Wilson believes the current AI cycle shares similar characteristics. While capital waste is inevitable, tech giants are pouring record capital expenditures into building AI infrastructure—these investments, supported by internal cash flows, are continually opening up new growth space. The few eventual industry leaders are expected to drive a revaluation of the entire market’s long-term value.

While maintaining a constructive outlook, Goldman Sachs also acknowledges that some market indicators have reached extreme levels. This week, high-beta momentum portfolios posted the largest one-day gain in history; both risk preference and stock momentum indicators have risen to rare highs not seen since 2000, reflecting highly concentrated capital in a small number of hot tech stocks.

Risk Warning and DisclaimerThe market involves risk; investment requires caution. This article does not constitute personal investment advice, nor does it take into account individual users’ particular investment goals, financial situation, or needs. Users should consider whether any opinions, views, or conclusions in this article suit their specific circumstances. Any investment made based on this article is at your own risk.