Goldman's Varadhan urges staying invested as oil seen below $70

Goldman Sachs' Ashok Varadhan is telling investors to stay in the market, betting the Fed holds rates, oil slides below $70 and AI lifts productivity.

"Stay invested would be my advice," Varadhan, co-head of global banking and markets at Goldman Sachs, said on the firm's "The Markets" podcast last week.

The S&P 500 has rallied to a record high, bringing 2026 gains to more than 13 percent. Varadhan's view on rates runs against market pricing that reflects some risk the Fed could resume tightening. Following a disappointing jobs report Friday, traders shifted bets — odds for a September hike fell to around 50 percent Monday and 63 percent for October, according to the CME Group's FedWatch gauge of futures prices.

If Varadhan's base case holds, falling energy prices would ease inflation pressure and support front-end U.S. yields, reinforcing his broader constructive view on equities and credit into year end.

Some of the forces that pushed inflation higher are beginning to recede, including the impact of tariffs, he said. An easing of geopolitical tensions around the Strait of Hormuz could further alleviate price pressures.

Oil Seen Sliding Below $70 as Hormuz Tensions Ease

Varadhan expects crude prices to retreat significantly as the year progresses. "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." West Texas Intermediate futures climbed back above $80 per barrel Monday as doubt grew that the U.S. and Iran will reach a deal to increase ship traffic through the Strait of Hormuz.

The oil call sits in tension with the escalation reported over the weekend, including Iran's missile strike on a tanker in the U.S.-backed southern corridor of Hormuz. If Goldman's base case holds and a deal eventually lands, the drop in energy prices would also be disinflationary and supportive of his call for the Fed to stay on hold. But if the standoff hardens further, that chain reverses — energy prices firmer for longer, more persistent inflation pressure, and a harder case for a Fed hold.

AI Buildout Turns Disinflationary Once Capacity Lands

Varadhan also sees AI eventually becoming a disinflationary force. While the enormous infrastructure buildout needed to support artificial intelligence can strain resources and contribute to inflation in the near term, the productivity benefits should have the opposite effect once that capacity is in place, he said.

The third pillar of his view is the resilience of the economy. Despite a series of external shocks, underlying nominal growth has remained remarkably durable, Varadhan said. If some of those pressures fade, the economy could continue to expand while benefiting from AI-driven productivity improvements.

That resilience is also keeping Varadhan constructive on credit. Heavy issuance means investors should demand somewhat more compensation for taking risk, he said, but the strength of the economy has helped prevent spreads from widening dramatically. "If you think the exogenous shocks are going away and you still have the resilience of the economy," expectations for realized defaults can remain "fairly low," he said.

Varadhan said much of the leverage built up in the AI trade has now been unwound, which he expects to support a higher quality rally rather than a repeat of July's volatility, marked by war re-escalation, Fed hike jitters and a sharp unwind in tech momentum. Dispersion between single-stock and index volatility is likely to remain elevated given how differently the AI theme affects companies depending on their position in the supply chain, he said.

On currencies, Varadhan said he is skeptical that yen intervention will succeed over the longer run, arguing that genuine stabilization requires the Bank of Japan to normalize interest rates properly rather than relying on intervention.

The benchmark 10-year Treasury yield settled at 4.62 percent as falling oil eased pressure on the Fed, while the dollar index hovered near six-week lows on Middle East peace hopes. Asked to package his views into a single trade, Varadhan pointed to energy, saying he expects oil to settle back down well below $70 a barrel later in the year, a call that makes him constructive on front-end U.S. yields. The coming jobs report and further inflation readings are the key data points he is watching next.

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