Goldman Sachs indicates that the most ideal scenario for the stock market may be brewing.
Strategists at this Wall Street bank are focusing on a "Belle" scenario that suits the market, where economic growth is neither overheated nor too sluggish. This means that the economy grows at just the right pace, which can boost investors' optimism without allowing inflation to get out of control. Goldman Sachs wrote in a report sent to clients on Monday that such an environment is expected to drive a new round of gains in the stock and bond markets in the coming months.
Goldman Sachs stated that, based on strong economic growth prospects and cooling inflation, the firm has increased its stock allocation to overweight for the next three months, as well as its bond allocation to overweight for the next 12 months. Strategists added that third-quarter earnings are also expected to exceed expectations, and they estimate that after excluding "other income" related to equity revaluation, the earnings growth of the S&P 500 index will reach 18% in 2027.
A team led by Christian Mueller - Glissman wrote: "Our macro baseline scenario remains positive: growth should remain healthy, particularly beneficial for profits, the risk of recession is still low, and inflationary momentum should slow down before 2027. This combination of resilient growth and moderating inflation points to a scenario closer to that of 'Cinderella,' which should be more favorable for balanced investment portfolios."
In recent months, as inflation has remained high, some Wall Street strategists have ruled out the "Belle in the Woods" scenario. Energy prices have risen significantly in the middle of summer, mainly due to the war in Iran and the increase in oil prices.
At the same time, the government bond market has also recently experienced historic selling pressure, driving yields to levels not seen in decades. The yield on benchmark 10-year U.S. Treasury bonds is still close to its highest level since 2002 and has risen significantly recently due to investors readjusting their expectations for interest rates.

Although the main stock indices are still near record highs, the breadth of the market has clearly deteriorated. More than half of the stocks in the S&P 500 index have fallen by at least 20% from their recent highs and have entered a bear market territory.
However, there are still a few basic economic indicators suggesting that growth may remain strong. According to the latest GDPNow estimates from the Federal Reserve of Atlanta, the U.S. economy is expected to grow by 3.6% in the third quarter.
The labor market also maintains its resilience. Although the number of new jobs created in September fell far short of expectations, the United States still added 133,000 jobs in August. The unemployment rate in September also remained near a historic low, at 4.2%.
At the same time, Goldman Sachs strategists stated that inflation is nearing its peak and pointed out that the momentum of market-driven inflation "significantly" declined in the second quarter. In August, the year-on-year growth rate of consumer prices remained at 3.4%.
Goldman Sachs added that a 60/40 investment portfolio – which is a classic investment strategy that allocates 60% to stocks and 40% to bonds – usually performs best when inflation declines, and stated that it believes the downside risk for such a portfolio over the next year is “relatively small.”
Strategists write: 'The main short-term downside risks for stocks remain higher interest rates and energy prices; in addition, the uncertainty of the mid-term elections in the United States could cause stock market volatility to rise from its current low levels.'
This line indicates a preference for a dumbbell strategy, which involves balancing between high-growth global tech stocks and stocks that are sensitive to interest rates, have low volatility, offer high dividends, or serve as a "bond substitute." A dumbbell strategy involves allocating investments in both high-growth and defensive assets, with the idea of using the returns from one side to offset losses from the other.












