Goldman Sachs: Investors Should Stay Invested — Three Key Factors to Support Continued U.S. Equity Rally

Ashok Varadhan, co-head of Goldman Sachs Global Banking & Markets, continues to recommend that investors remain in the market. He believes that the Federal Reserve will not raise interest rates this year, oil prices are expected to decline in the second half, and artificial intelligence (AI) will gradually enhance productivity—three major positive factors supporting risk assets.

Despite persistently high interest and oil prices, the S&P 500 Index has recently returned to record highs, rising over 13% year-to-date. As concerns grow about whether the U.S. economy can sustain its growth momentum, Varadhan offered his advice during Goldman Sachs’ podcast series 'The Markets,' urging continued investment in U.S. equities.

First, on monetary policy, Varadhan expects the Federal Reserve to keep interest rates unchanged for the remainder of the year, without restarting rate hikes. This outlook is more optimistic than market expectations, as inflation remains sticky, and traders had previously bet on the Fed resuming its tightening cycle.

However, after the latest U.S. employment report showed weaker-than-expected results, markets have downgraded the probability of near-term rate hikes. According to the CME Group’s FedWatch tool, traders on Monday estimated only about a 50% chance of a rate change in September, and approximately a 63% chance of action in October.

Varadhan pointed out that some factors driving up prices are weakening, including the impact of tariffs on inflation. If geopolitical tensions around the Strait of Hormuz ease, energy and transportation costs could further decline, helping to alleviate overall price pressures.

Second, while AI may contribute to inflation in the short term, it is expected to become a disinflationary force in the long run. Currently, technology firms are investing heavily in building data centers and AI infrastructure, creating significant capital expenditures that strain electricity, chips, and other resources—temporarily increasing costs. However, once these capacities come online, the productivity gains from AI are expected to help companies reduce operating expenses, ultimately generating deflationary effects.

The third positive factor comes from energy prices. Varadhan predicts that in the latter half of 2026, crude oil prices will decline significantly, potentially falling below $70 per barrel and possibly even lower. Lower energy costs would not only help ease inflation but also reduce the burden on businesses and consumers alike.

Nonetheless, oil markets remain sensitive to developments in the Middle East. Due to market skepticism over whether the U.S. and Iran can reach an agreement to increase vessel traffic through the Strait of Hormuz, West Texas Intermediate (WTI) crude futures climbed back above $80 per barrel on Monday.

Beyond interest rates, AI, and oil prices, Varadhan also expressed optimism about the resilience of the U.S. economy. He noted that despite a series of external shocks, nominal U.S. economic growth has remained robust. If geopolitical and inflationary pressures gradually subside, the economy could continue expanding, driven by AI-enhanced productivity.

This solid fundamental backdrop also leads Varadhan to maintain a positive view on credit markets. Although bond issuance volumes are large and investors should demand higher risk compensation, credit spreads have not widened significantly due to economic resilience. As long as external shocks fade, actual corporate default rates are expected to remain relatively low.