Author: Li Dan, Wall Street Insights

The global economy has shown unexpected resilience following the impact of the Iran war in 2026, but Goldman Sachs warns that the growth path for 2027 will be bumpier, with risks clearly tilted to the downside.

The 2027 macro outlook report, led by Goldman Sachs chief economist Jan Hatzius, predicts global GDP growth will slightly rise from 2.7% in 2026 to 2.8%, slightly above potential growth rate.

The core judgment of the report is: the normalization of energy prices and sustained strong AI capital expenditure will provide major support, but tighter financial conditions and the retreat of fiscal stimulus will act as a counterbalance, resulting in an overall growth pattern that is "robust but muted." Meanwhile, Goldman Sachs explicitly highlights three significant downside risks—escalation in the Iran situation, turbulence in the bond market, and the AI investment cycle peaking prematurely—and believes that the challenges faced by the market will be more severe than those posed by the macro economy itself.

At the monetary policy level, Goldman Sachs predicts the Federal Reserve will raise interest rates once in December and again in March of next year, while the European Central Bank will complete its final rate hike in December, after which both central banks are expected to switch to rate cuts by the end of 2027. Goldman’s interest rate forecasts are overall more dovish than market pricing, which could be a potential boon for both stocks and bonds. In asset allocation, Goldman maintains a baseline forecast for positive returns on stocks and bonds but emphasizes that as the market cycle matures, the probability of increased volatility is greater than that of decline, recommending investors enhance hedges and diversify allocations.

Switching Growth Momentum: Energy as a Tailwind, AI Investment Remains the Main Engine

In 2026, the surge in AI capital expenditure, loose financial conditions, and fiscal expansion in economies such as the U.S. and Germany largely offset the energy supply shock caused by the Iran war, resulting in a global economic growth of 2.7%, only 0.1 percentage points lower than Goldman’s previous forecast. Taiwan and South Korea significantly outperformed due to a surge in AI exports, exceeding expectations by 8.6 percentage points and 1.9 percentage points, respectively, while the U.S. and Eurozone lagged slightly.

Looking ahead to 2027, energy price shocks are expected to transition from a hindrance to a support. Goldman Sachs' baseline forecast from its commodity strategists indicates that Brent crude oil prices will fall to $78 per barrel by the end of 2027, with global LNG prices normalizing. The drag from energy prices on global growth is expected to shift from 0.4 percentage points in 2026 to a slight uplift.

AI capital expenditure remains the most important growth engine. Goldman predicts global nominal AI investment will rise from $1.1 trillion in 2026 to $1.8 trillion in 2027, with increments mainly coming from the U.S. hardware expenditure exceeding $500 billion. AI investment is expected to contribute approximately 0.4 percentage points to global GDP growth, with the contribution to the "real" GDP growth of the U.S., adjusted for the exclusion of semiconductor investments and chip-related IP exports, estimated to be about 0.6 percentage points.

In terms of fiscal and financial conditions, Goldman’s GS Financial Conditions Index (GS FCI) tightened by about 50 basis points in the U.S. and about 30 basis points in developed markets over the past three months, which will moderately drag on growth in the coming quarters. The marginal effects of fiscal expansion are also diminishing, with the main exception being Japan—where reductions in consumption tax, increased defense spending, and high municipal investment plans are expected to provide a 0.7 percentage-point boost to Japan's GDP growth.

In key economic forecasts, Goldman Sachs holds a relatively optimistic view of U.S. economic growth, predicting a growth rate of 2.4%, higher than the market consensus of 2.2%, while being more pessimistic about Europe, predicting a growth rate of 0.9%, below the consensus expectation of 1.3%, primarily due to tightening financial conditions and elevated energy prices expected to become evident this winter. Goldman predicts China's growth rate to be 4.5%, slightly higher than the market consensus of 4.4%.

Three Major Downside Risks: Energy, Bond Market, and AI Cycle

Goldman Sachs clearly qualifies the global growth risks for 2027 as leaning towards the downside and cites three main pathways.

1. Escalation in the Iran situation. An upside scenario that Goldman’s commodity strategists assign greater weight to is that increased shipping attacks, damage to oil infrastructure, and a more persistent risk premium could push oil prices up to $132 per barrel. If this scenario materializes, energy price shocks will continue to drag on global growth in 2027, and unlike in 2026, financial conditions and fiscal policy will be less able to provide equal levels of counterbalance.
2. Turbulence in the bond market. The yield curve in developed markets is currently about 85 basis points higher than at the beginning of 2026. Goldman estimates that if this rise continues, it will accumulate to drag GDP down by about 0.5% through housing, durable goods, and business investment channels. France's fiscal risk is particularly pronounced—10-year French government bond (OAT) yields are approximately 150 basis points higher than German bonds, and fiscal health indicators have turned red. Goldman expects substantial fiscal consolidation discussions will not start before the April 2027 French presidential election and June parliamentary elections, but markets may exert pressure early, leading to greater growth drag.
3. Weakening impact of AI investments. Goldman notes that the stock prices of hyperscalers have shifted from a positive response to signals of higher capital expenditure during earnings conference calls from 2024-2025 to a slight negative in 2026, as the market begins to worry about over-investment. Additionally, the magnitude of upward revisions in capital expenditures for hyperscale companies during the third quarter reporting season has slowed, indicating that the peak of the AI investment cycle is becoming increasingly clear.

Regarding the impact of AI on the labor market, Goldman has observed early signals: in non-manufacturing sectors, the adoption rate of AI in routine business functions shows a statistically significant negative correlation with employment growth, and a positive correlation with unemployment rates—this correlation was not significant earlier in the year. Goldman’s baseline forecast suggests that the impact of AI on the labor market will primarily concentrate between 2028 and 2029, but if economic downturn occurs, companies may more aggressively cut hiring targets, accelerating this process.

Inflation: Progress Expected, but Upside Risks Remain

Inflation exceeded expectations in 2026, mainly due to the rise in energy prices triggered by the Iran war, with global overall inflation calculated year-on-year in the fourth quarter standing at 3.7%, 1.3 percentage points higher than Goldman’s previous forecast.

Looking forward to 2027, Goldman believes the conditions for a decline in inflation are forming. In the U.S., the tariff transmission effect (currently contributing about 40 basis points to the core PCE year-on-year growth rate) is expected to fully exit the year-on-year statistics by next spring, combined with the fade of the inflation shock from the Iran war, Goldman predicts the U.S. core PCE increase will slow from 3.2% at the end of 2026 to 2.4% by the end of 2027.

However, inflation may still maintain a certain stickiness in early 2027. Goldman lists three reasons:

• The transmission effect of rising energy prices will continue into next year, particularly evident in Europe, where European airline ticket prices have not fully reflected the rising fuel costs;
• Global memory price forecasts were raised again in the last earnings reporting season, which will provide additional upward momentum for core inflation, particularly affecting the U.S.;
• Upstream cost pressures have increased and spread, and historical patterns show this will keep the risk of upside inflation surprises elevated before next spring.

Goldman also points out that if the Iran situation escalates again, according to adverse scenario assessments by its commodity team, overall inflation in 2027 will be 0.9 percentage points higher than the baseline, with core inflation being 0.2 percentage points higher.

Monetary Policy: Rate Hikes Nearing End, Rate Cut Path Becoming Clearer

Goldman expects the Federal Reserve will raise interest rates once in December and once in March next year, followed by a rate cut beginning in December 2027, with three additional cuts in 2028, bringing the terminal rate to 3.25% to 3.5%. Goldman believes U.S. interest rate risks are skewed towards a dovish stance, due to the more clearly transient nature of inflationary drivers and the largest exposure to the AI cycle decline in the U.S.

Regarding the European Central Bank, Goldman anticipates the final rate hike will occur in December, followed by a normalization of rate cuts starting in the fourth quarter of 2027, with a terminal rate of 2.25%. The Bank of England is expected to make its final rate hike to 4.25% in February next year, and then remain unchanged, delaying the rate cut to a terminal rate of 3.25% until 2028. Goldman’s forecasts for both the European Central Bank and the Bank of England are more dovish than market pricing.

Japan is a major exception. Goldman forecasts that the Bank of Japan will raise rates by another 25 basis points at the December monetary policy meeting and continue raising rates in March and June next year, reaching a terminal rate of 2.0%, due to inflationary uptrend risks and the pressure of high global rates on the yen.

In emerging markets, Goldman maintains a generally dovish stance, expecting most central banks in Central and Eastern Europe, the Middle East, Africa, and Latin America to cut rates in 2027, while rates in Asia are expected to remain largely flat or rise slightly.

Market Outlook: Positive Returns Expected, But Volatility Risks Increase

Goldman’s baseline forecasts show that both stocks and bonds will record positive returns in 2027, while commodity returns are expected to approach zero. However, Goldman also warns that the challenges faced by the market will be more severe than the macroeconomy itself.

For the stock market, Goldman projects that S&P 500 earnings growth will decline from 36% in 2026 to 11% in 2027, still robust, but the slowing growth rate signals that concerns about the peak of the AI investment cycle will gradually intensify.

Goldman notes that the AI investment boom has contributed far more to corporate profits and market capitalization than to GDP growth—the share of S&P 500 earnings to GDP has reached a historical high—once the investment shock fades, the market will face critical questions about whether this high profit share can be sustained. In terms of regional allocation, Goldman recommends overweighting the U.S. and Japan, neutral allocation for regions in Asia excluding Japan and emerging markets, and underweighting Europe.

For the credit market, Goldman expects credit spreads to further widen in 2027, with U.S. high-yield bonds lagging, and risks from low-quality borrowers could trigger wider-ranging turmoil in the financing market.

For the bond market, Goldman believes real yields are at a nearly 30-year high, and the hedging value of bonds is gradually recovering. As growth risks rise in the second half of 2027 and the central bank's rate hike cycle nears its end, the negative correlation between bonds and stocks is expected to reappear. Goldman forecasts the yield on 10-year U.S. Treasuries will decline to 4.6% by the end of 2027.

Regarding the currency market, Goldman’s baseline forecast indicates a modest weakening of the dollar, while the renminbi continues to appreciate under the support of trade surpluses. If market skepticism regarding the "exceptionalism" of U.S. tech stocks accelerates, the dollar may experience a more significant decline, while the yen may appreciate significantly due to safe-haven demand.

In the commodity sector, Goldman suggests using it as a hedging tool in investment portfolios, with European natural gas futures and TTF call options serving as asymmetric hedging means against the upside risks in energy prices. Additionally, Goldman believes that as the market cycle matures, stock index volatility is more likely to increase than decrease, and recommends that investors consider seeking deeper protection by using out-of-the-money put options or replacing stock holdings with long call options.

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