Goldman Sachs raises global equities rating to overweight, while Bank of America issues a sell signal! US stock earnings season becomes a key test.

Goldman Sachs Group, Inc.'s equity strategy team raised its three-month rating on global equities from neutral to overweight, aligning with its existing one-year bullish stance. The team's stated rationale in the report: rising oil prices and bond yields have stalled the previous rally, easing valuation pressure, while corporate earnings prospects remain solid. "Earnings growth continues to support equities, and the recent valuation pullback has improved the risk-reward ratio heading into the third-quarter earnings season," said Christian Mueller-Glissmann, head of the team. First, let's clarify the nature of this upgrade. It is a tactical asset-allocation rating, not a price targetGoldman Sachs Group, Inc.'s target of 8,000 for the S&P 500 by end-2026 (raised from 7,600 in May) is a separate matter, and this report contains no new index-level judgment. Based on the latest compiled broker targets, 8,000 sits roughly in the middle-to-optimistic range: BofA Global Research has 7,400, Barclays 7,950, JPMorgan, Deutsche Bank, Morgan Stanley and Goldman Sachs Group, Inc. all have 8,000, while Citi, UBS Group AG Global Research and HSBC have 8,100. The Earnings Hurdle This upgrade is a bet on a "high-stakes earnings season." According to data compiled by industry research, analysts expect S&P 500 constituent profits to grow 25% year-over-year in the third quarter, one of the best growth rates on record; the Goldman Sachs Group, Inc. team believes actual results will exceed this hurdle. The height of the hurdle changes depending on which statistical measure you use. According to FactSet data, S&P 500 third-quarter earnings per share are expected to grow 29.5% year-over-year, with revenue up 12.3%. If realized, this would mark the third consecutive quarter of growth exceeding 25% and the eighth consecutive quarter of double-digit growth; fourth-quarter growth is projected at 27.6%, with full-year 2026 growth at 32.4% (data as of October 2). The 4.5-percentage-point gap between 25% and 29.5% means which one Goldman Sachs Group, Inc. intends to "exceed" directly determines how much weight that statement carries. This time, expectations were not revised down steadily ahead of earnings season. FactSet notes that from end-June to end-September, S&P 500 third-quarter EPS expectations were actually revised up by about 1.4%, versus an average downward revision of 2.2% over the same period in the past five years; as of September 25, 72 of 116 companies (62%) that had issued quarterly guidance gave positive guidance, far above the five-year average of 40%. More noteworthy is the concentration of earnings growth. According to an analysis by ZeroHedge citing earnings forecasts from Goldman Sachs Group, Inc. and FactSet, NVIDIA Corporation (NVDA.US) and Micron (MU.US) are expected to account for more than one-third of S&P 500 third-quarter EPS growth, contributing more than the bottom 490 companies in the index combined; AI infrastructure-related companies are expected to contribute more than half of the quarter's EPS growth. Barclays' calculations point in the same direction: semiconductors and tech hardware together account for just 29% of S&P 500 weight, yet contributed about 75% of fiscal 2027 EPS upward revisions and are expected to contribute about 70% of that year's index earnings growth. Barclays also ran a stress test: if fiscal 2027 semiconductor EPS were revised down 15% while other sectors' earnings remained unchanged, the S&P 500 could still achieve above-trend double-digit growth; only if semiconductors and other sectors were revised down simultaneously would index growth likely fall back to near its long-term trend. The precondition for this buffer to exist is that other sectors don't follow suit. Earnings quality also leaves a gap. According to an October 7 note from Charles Schwab Corp, the tech sector's third-quarter earnings are expected to grow about 65%, part of which comes from investment gains on holdings such as SpaceX and OpenAIthese are paper gains, not cash, and could reverse if the AI boom decelerates. "Valuations Have Already Priced It In": Evidence and Counter-Evidence Goldman Sachs Group, Inc.'s starting point is that "the pullback has lowered valuations." This is supported by data: the S&P 500's forward 12-month P/E has fallen from 20.4x at end-June to 19.0x, below the five-year average of 19.8x and roughly in line with the ten-year average of 19.1x (FactSet, as of October 2). But putting stocks and bonds side by side flips the conclusion. Based on October 9 data, the S&P 500's forward earnings yield is 4.33%, the 10-year Treasury yield is 5.24%, and the gap between them is -91 basis pointsmeaning the earnings return from holding stocks is lower than the interest from holding Treasuries, at the 11th percentile of the full history of this metric since 1990, versus a historical median of +198 basis points. A cruder measure tells the same story: based on Shiller's long-term data, the simple difference between the S&P 500 earnings yield and the 10-year Treasury yield was -1.42% on October 1, at the 10.3rd percentile, versus a historical average of +2.71%; Shiller's "excess CAPE yield" read 0.56 points in October, the lowest since March 2002. This is the flip side of the phrase "improved risk-reward ratio": valuations have indeed pulled back from highs, but they've pulled back to a position where the stock-bond yield gap is near zero. At 7,802 points and forward EPS of about $411, each 1x change in P/E corresponds to roughly 410 points of index movement17x implies about 6,981 (-10.5%), 21x implies about 8,623 (+10.5%). At this position, a modest earnings miss will be amplified more easily than usual. Barbell, Regions, and That Asia Report Ten Days Ago Goldman Sachs Group, Inc.'s allocation structure is a "barbell strategy": global tech stocks at one end, and select rate-sensitive "bond-like" stocks whose valuations have already de-rated since summer at the other. Regionally, it maintains overweight on Asia and the US, underweight on Europe. The Asia leg had a more complete version ten days earlier. On October 8, Goldman Sachs Group, Inc. published the global strategy report "Investing in a differentiated Asia" (Global Strategy Report No. 78), giving a 12-month target of 1,120 for the MSCI Asia Pacific ex-Japan index, corresponding to about 26% price return in USD terms, and projecting regional earnings growth of 75% in 2026, 25% in 2027, and 14% in 2028versus a compound growth rate of just 6% for the region from 2011 to 2025. It also raised long-term forecasts: annual earnings growth over the next decade from 9% to 10%, with a ten-year annualized USD total return forecast of 13.6%, at the 89th percentile historically. The report notes that information technology will account for 47% of 2026 regional earnings, with memory chips potentially making up about 70% of that; the risk is explicitly stated in the concentrationthe top six tech stocks account for 36% of the index's market cap. Within the region, Goldman Sachs Group, Inc. is overweight Korea, Taiwan, Japan and China A-shares, and underweight Australia, Thailand, Indonesia and the Philippines, with a 12-month target of 12,000 for Korea's KOSPI. Europe is the other end of this chain. A September 18 survey showed strategists' median year-end target for the Stoxx Europe 600 at 670, the most optimistic reading since 2018; yet Goldman Sachs Group, Inc. maintained underweight on Europe this time. The two aren't necessarily contradictoryone is a price target, the other a regional allocation weightbut the directional difference is clear: Goldman Sachs Group, Inc. macro trader Rikin Shah's judgment is that the US is clearly the winner in the AI wave, while Europe is not, and further widening of sovereign bond spreads would tighten Europe's financial conditions further. In intraday European trading on October 12, the Stoxx 600 rose 0.56% to 635.09, still about 5% away from the 670 target. The Real Pivot Is Bonds What's more worth reading in this report than the equity rating is the bond call. Goldman Sachs Group, Inc. kept its three-month rating on bonds unchanged at neutral, but raised its 12-month rating to overweight, with a line rarely seen in sell-side research: "We believe bonds should gradually shift from a portfolio drag to a hedging tool." Putting this alongside the equity call completes the logic: being overweight both stocks and bonds over 12 months means Goldman Sachs Group, Inc. is earning from corporate profits while using bonds to hedge the two risks it itself listshigher rates and higher energy prices. This also explains why it treats "equities turning overweight at three months" and "bonds still neutral at three months" separately: within three months, rates are still rising and bonds are still under pressure, so no hedge; over 12 months, duration starts to become protection. The Other Side: BofA Is Hoarding Cash Not all sell-side firms are moving in the same direction. Michael Hartnett of BofA Securities offered a different set of judgments in his October 8 "Flow Show" report: the November 3 US midterm elections are the biggest potential catalyst for a 10% swing in global equities before year-end. He cites market predictions showing the probability of a Democratic sweep of both chambers has risen from 49% in September to 64%; if that scenario materializes, US equities face more than 10% downside risk; BofA's Bull & Bear Indicator fell from 8.8 to 8.1, maintaining a "sell" signal. Fund flows are on his side: global money market funds saw net inflows of $166.4 billion that week, the largest weekly inflow since April 2020, with global money market fund assets rising from $5 trillion in 2023 to $8 trillion; US Treasuries saw net inflows of $16.6 billion; financial stocks suffered their largest weekly net outflow since March 2026, about $3 billion. BofA Global Research's end-2026 S&P 500 target is 7,400, one of Wall Street's most cautious forecasts; analyst Savita Subramanian raised it from 7,100 to 7,400 in September while still flagging rate risk. Historical midterm election statistics provide ammunition for both sides. According to LPL Financial data, in all 17 midterm elections since 1954, the S&P 500 rose in the 12 months after the election without exception, with an average gain of 18.2%; but the average maximum drawdown in midterm election years themselves was 19.4%, versus only 12.5% in other years (since 1960). In other words, volatility and returns occur sequentially in such years, not simultaneously absent. Back to the testable variable: whether this rally can hold through year-end depends on whether the 25% to 29.5% earnings hurdle is cleared or sidestepped. With the S&P 500 just shy of its record closing high, and in a valuation structure where the stock-bond yield gap has already hit zero, Goldman Sachs Group, Inc. is choosing to add equities while BofA is choosing to hoard cashboth are waiting for the same batch of earnings reports.