Goldman Sachs partner Mark Wilson recently noted that global equity markets are facing increasingly clear upside opportunities before year-end.

The market has already fully priced in stagflation risk, and as a milder "Goldilocks" economic scenario gradually takes shape, investors do not need to wait for the U.S. midterm elections to conclude before returning to risk assets.

Recent price action is confirming this optimistic view, with AI-driven fear of missing out having returned to the market. Following Meta's launch of the Muse product, expectations for the timeline of large-scale AI adoption among consumers accelerated markedly, pushing AI-themed assets such as the Nasdaq index to a strong upward breakout on Monday after three months of consolidation and position reduction following a historic second-quarter surge.

Meanwhile, U.S. bond yields have climbed again. Unlike previous bouts of fund competition driven by government and AI capital spending, or inflation pressure from energy prices, this round of yield increases is mainly supported by stronger-than-expected data such as the Purchasing Managers' Index, reflecting continued strong U.S. nominal economic growth, with stocks holding their gains even amid significant yield volatility.

There is widespread concern that the seven-month streak of gains in the U.S. 10-year Treasury yield, the longest in fifty years, will ultimately drag down stocks, and investors prefer to wait until Gulf tensions ease and the midterm elections pass safely before adding risk exposure again.

However, Goldman Sachs' analysis breaks with this consensus, pointing out that substantive improvements in three fundamental areas, inflation, economic growth and corporate earnings, are providing a solid foundation for a year-end stock rally.

Inflation pressure easing and the deflationary effect of AI. For some time, energy price increases driven by the Iran conflict masked the downward trend in core inflation.

But Goldman Sachs notes that tariff pass-through effects are now weakening, and rate hikes along with the resulting tighter financial conditions have taken effect. If logistics flows through the Strait of Hormuz return to normal, energy prices will face significant downside risk, especially considering that Iran's maximum bargaining window is expected to close around November 2, a new deflationary energy narrative could emerge at any time.

More importantly, Meta's Muse product has fired the "first shot" of deflation in consumer goods and services. Goldman Sachs research on the "era of commercial agent AI" shows that technological progress is substantively reducing costs on the consumer side, which will become a more important deflationary driver than falling energy prices.

Cooling growth expectations limit central bank hawkishness. Despite geopolitical and energy price uncertainty over the past six months, U.S. economic activity has shown greater resilience than expected.

However, research by Goldman Sachs economist Jan Hatzius shows that this upside risk is diminishing, and the second derivative of economic growth will begin to slow. As fiscal benefits such as tax cuts fade, rising gasoline prices and mortgage rates will hit some parts of the economy and consumers. In addition, the AI capital spending cycle will continue but at a slower pace.

Combined with expectations of falling inflation, central banks' future rate hikes are highly likely to be smaller than current market pricing. Mark Wilson stressed that now is not the time to worry about higher yields, such concerns were only reasonable seven months ago.

Core earnings remain strong, fundamentals support stock valuations. In response to the intense debate over corporate earnings sustainability and an "earnings bubble," Ben Snider, head of Goldman Sachs' U.S. strategy team, believes some companies are experiencing "excess earnings" but that no broad earnings bubble has formed.

Goldman Sachs urges investors to note three facts: first, they should not pay a high premium for record "other income"; second, memory chip and some semiconductor stocks are indeed in a state of excess earnings; third, at least until the end of 2027, core corporate earnings are highly likely to remain particularly strong even if growth slows, providing fundamental support for stock valuations.

Stagflation narrative collapses, "Goldilocks" reshapes the market landscape. The market had been trying to price in a significant slowdown in growth and earnings along with higher rates, but macroeconomic data does not support this perfect "stagflation" narrative.

Instead, slower growth, reduced inflation threats, a softening central bank stance and a year of valuation downgrades together form a favorable market combination. Goldman Sachs believes the current situation is very similar to the bull-bear debate during the major technological transformation period of the mid-to-late 1990s.

If the market ultimately gets a "Goldilocks" scenario, meaning growth that is just right, neither hot enough to trigger inflation nor cold enough to cause recession, then the historical pattern of a year-end stock rally after midterm elections still applies.

Mark Wilson concluded that investors should not wait for the midterm elections to end before acting, and that as the energy price threat fades, European and UK stock markets are also well positioned to participate in this rally.