Since early September, the global market sentiment has significantly improved. The strong performance of the US non-farm payrolls in September, combined with aggressive moves by the People's Bank of China, is making the global economic outlook more positive. At one point, the stock markets in China, Europe, and the US surged together.

However, as we enter October, the US CPI in September exceeded expectations across the board, and oil prices have rebounded recently, shifting the market focus back to inflation. The latest research report from Goldman Sachs points out that with subtle changes in investor sentiment, the core narrative of the global market is shifting from a "golden-haired girl" economy to a "re-inflation" one.

On Monday local time, analyst team of Andrea Ferrario at Goldman Sachs released a report:

Since early September, the overall market sentiment has become more optimistic. Our risk appetite indicators showed a significant positive shift last week, primarily driven by a repricing towards bullish growth expectations. In September, the monetary policy factor PC2 rose in sync with the global growth factor PC1, reflecting the market's expectations of a "golden-haired girl" economic environment.

However, starting from early October, PC2 has declined, pricing in an environment closer to "re-inflation." We anticipate the market to continue fluctuating between the "golden-haired girl" and "re-inflation" economic environments by the end of this year.

Goldman Sachs believes that in a "re-inflation" environment, the market may prefer assets that benefit from economic recovery and rising inflation. Goldman Sachs maintains a positive outlook on the returns of risk assets in the next year, adjusting its stock and credit ratings from neutral to overweight for the next three months.

Growth expectations have become a major driver for asset appreciation.

The revaluation of economic growth is also intuitively reflected in the market trends, as highlighted in a Goldman Sachs report that significant changes have occurred in the global market's response to macroeconomic data over the past few months:

In the first half of this year, the market interpreted the 'bad news' in the economy as 'good news' for the Fed's rate cuts. However, by summer, the market's response to 'bad news' became more genuine and direct, where 'bad news' remains 'bad news'.

Recently, 'good news' has been positive news for growth pricing, but not so obvious for policy pricing, as investors anticipate a reduced risk of economic recession and have concerns about inflation reacceleration.

In fact, the market has significantly reduced the likelihood of rapid rate cuts by the Fed, and the expected pace of rate cuts is aligning with other central banks globally.

Currently, Goldman Sachs believes that growth expectations have become a more important driving factor for cross-asset returns.

In the 'reinflation' environment, Goldman Sachs is more bullish on stocks and credit.

The Goldman Sachs report points out that as the core narrative shifts from the 'golden-haired girl' economy towards 'reinflation', the performance of different asset classes has also changed.

Specifically, in the 'golden-haired girl' environment, the market typically favors stable growth and low-risk assets, whereas in the 'reinflation' environment, the market may prefer assets that benefit from economic recovery and rising inflation.

Using the global asset performance in the past two months as an example, Goldman Sachs reports:

In September, the cyclical stocks in Europe and Japan saw a more pronounced increase compared to defensive stocks, but cyclical stocks in the USA showed stronger growth compared to defensive stocks this month. In the second half of September, assets influenced by China, such as Chinese stocks and copper, performed the strongest in terms of standard deviation returns. Broad stock indices and credit spreads also showed relatively strong returns.

However, since early October, the pro-cyclical repricing led by inflation breakevens and oil - our interest rate team believes that long-term US inflation bulls may act as potential hedges against tariff risks. The US dollar has also strengthened against both cyclical and safe-haven currencies.

Goldman Sachs holds an optimistic view on the returns of risk assets in the next year, adjusting its stock and credit ratings for the next three months from neutral to overweight. Meanwhile, due to potential market volatility, Goldman Sachs believes selective hedging should be conducted.

Despite being in the late stage of the economic cycle, which typically implies a slowdown in growth, Goldman Sachs believes that the stock market still has the potential to achieve good investment returns through earnings growth, valuation improvements, and some structural growth opportunities. In contrast, the returns on credit assets may be relatively limited.

Editor/ping