As global economic uncertainties begin to stabilize, Goldman Sachs' latest research report indicates markets are experiencing a "Goldilocks" rally driven by Federal Reserve dovish expectations, reduced geopolitical risks, and progress in international trade negotiations. This macroeconomic environment—characterized by moderate growth and low inflationary pressures—has created favorable conditions for renewed risk appetite.

Three Key Market Drivers

The report identifies three primary factors shaping current market conditions. First, expectations for Fed dovishness have strengthened significantly. Goldman economists have brought forward their projected timing for the next rate cut to September 2024, while lowering their terminal rate forecast to a range of 3%-3.25%, reflecting market consensus for more accommodative monetary policy.

Second, geopolitical risk premiums are declining. The easing of Middle East tensions has alleviated investor concerns about potential conflicts, contributing to global market stability. Finally, positive developments in U.S. trade negotiations—including the removal of certain contentious provisions—have improved the outlook for global economic growth.

Shifting Investor Focus

Despite recent softness in U.S. economic data including personal spending and new home sales, these three factors have collectively improved the "global growth" component of markets. Goldman notes investors are currently prioritizing the positive implications of anticipated monetary easing over short-term economic fluctuations. The bank's risk appetite indicator has rebounded to 0.3, helping propel U.S. equities to record highs.

With macro concerns receding, attention is turning to corporate fundamentals. The report highlights improving earnings expectations, with upward revisions to consensus EPS estimates across multiple regions. Notably, EPS revisions in U.S. markets have turned positive.

Earnings Season Looms

The upcoming Q2 earnings season will test this optimistic sentiment. While analysts project just 4% EPS growth for the quarter—down from 12% in Q1—this sets a lower bar that companies may more easily surpass. Simultaneously, declining implied correlation among major indexes suggests investors expect greater stock-specific performance differentiation as macro influences diminish.

However, Goldman cautions investors against complacency. The crucial test comes with Thursday's U.S. jobs report—the bank forecasts 85,000 nonfarm payrolls versus the 113,000 consensus. A weaker-than-expected reading could further strengthen market expectations for rate cuts.