Goldman Sachs urges staying invested as Fed holds rates through 2026

Goldman Sachs is urging investors to stay in risk assets, arguing the Federal Reserve will hold interest rates steady through 2026, crude prices will fall below $70 a barrel, and artificial intelligence will ultimately act as a disinflationary force. The call comes as traders recalibrate wagers on monetary policy after a string of conflicting economic data.

"Stay invested would be my advice," Ashok Varadhan, co-head of global banking and markets at Goldman Sachs, said on the firm's "The Markets" podcast last week. "I don't think we will see hikes in the latter part of this year. I think rates are going to stay on hold."

The view runs against market pricing. CME FedWatch data showed roughly 50 percent odds of a September rate hike and 63 percent for October on Monday, after July nonfarm payrolls fell by 23,000 versus consensus for a gain of 83,000, with June revised down to a meager 20,000 increase. West Texas Intermediate futures traded above $80 a barrel as doubts grew over a U.S.-Iran deal to secure shipping lanes through the Strait of Hormuz.

The stakes are significant: the S&P 500 has rallied more than 13 percent in 2026 to record highs. If inflation continues its downward march, the soft-landing case strengthens, supporting long-duration bonds and growth stocks. If it reaccelerates, bond yields rise and rate-sensitive sectors face pressure.

Inflation data now trumps employment figures

Jan Hatzius, Goldman's chief economist, said inflation reports will carry more weight than employment figures in the Fed's reaction function. "I do think the inflation numbers are going to be more important than the employment numbers," Hatzius said in a separate interview, suggesting upcoming reports will reveal whether June's favorable inflation print was an anomaly or the start of a sustained cooling trend.

Matheus Dibo, Goldman's head of EMEA investment strategy, echoed that view, saying the Fed will likely keep rates unchanged for all of 2026. Early-year inflation data was driven by oil prices, the World Cup, and tariffs, Dibo said, but there is little sign of inflation spreading through the rest of the year. Housing inflation should ease given housing market trends, he added.

Goldman's internal timeline has been volatile. Earlier in 2026, the bank pushed its forecast for the first rate cut back to December, only to scrap those cuts entirely after a strong May jobs report. David Mericle, Goldman's chief U.S. economist, replaced the 2026 cuts with quarter-point reductions penciled in for June and December 2027, while doubling the estimated probability of a modest rate hike to 20 percent. The firm assigns just 30 percent probability to its own two-cut 2027 scenario.

Oil below $70 and AI's disinflationary turn

Varadhan's energy call is equally directional. "I think energy is going to go back down," he said. "I think oil settles back down well below $70 a barrel, maybe even lower once we get towards the latter part of the year." He sees the geopolitical risk premium fading and tariff impacts receding, which should allow headline inflation to ease.

The third pillar rests on AI's productivity potential. Varadhan acknowledged a near-term paradox where the massive infrastructure buildout for AI strains resources and adds to inflation. But once that capacity is operational, the resulting productivity boom should flip the script, acting as a sustained disinflationary force that supports economic resilience.

That resilience is keeping credit markets healthy. While heavy corporate issuance means investors should demand somewhat higher risk premiums, strong nominal growth prevents spreads from widening to distressed levels. "If you think the exogenous shocks are going away and you still have the resilience of the economy," Varadhan said, default expectations can remain "fairly low."

The last time the Fed faced a similar divergence between market pricing and institutional forecasts was in late 2023, when futures priced additional tightening while the central bank ultimately held steady — a pause that preceded a sustained equity rally through 2024. If Goldman's call proves correct again, the current record-high equity market could extend its run. If inflation reaccelerates, however, the scenario flips, lifting bond yields and punishing rate-sensitive sectors.

This article is for informational purposes only and does not constitute investment advice.