Global economies have displayed better-than-expected resilience after absorbing the shock of the 2026 Iran war, but Goldman Sachs cautions that the growth path in 2027 will be considerably more uneven, with the balance of risks tilting distinctly to the downside.

According to the 2027 macro outlook report led by Goldman Sachs Chief Economist Jan Hatzius, global GDP growth is projected to edge up to 2.8% from 2.7% in 2026, modestly above potential growth.

The central thesis of the report is that energy price normalization and persistently strong AI capital expenditure will serve as the primary supports, while tightening financial conditions and the fading of fiscal stimulus will act as offsets, producing an overall growth picture that is "solid but unspectacular." At the same time, Goldman Sachs explicitly identifies three major downside risks — a renewed escalation of the Iran situation, turbulence in bond markets, and the AI investment cycle peaking prematurely — and argues that the challenges facing markets will be more severe than the macro economy itself.

On the monetary policy front, Goldman Sachs expects the Federal Reserve to hike rates once each in December and next March, the European Central Bank to deliver its final rate hike in December, and both central banks to pivot toward rate cuts by the end of 2027. Goldman Sachs' interest rate forecasts are broadly more dovish than market pricing, a judgment that poses potential upside for both equities and bonds. On asset allocation, Goldman Sachs maintains its baseline forecast of positive returns for both stocks and bonds, but emphasizes that as the market cycle matures, the probability of rising volatility exceeds that of declining volatility, recommending that investors strengthen hedging and diversify their allocations.

Growth Momentum Shifting: Energy Turns into a Tailwind, AI Investment Remains the Main Engine

In 2026, surging AI capital expenditure, accommodative financial conditions, and fiscal expansion in economies such as the United States and Germany largely offset the energy supply shock triggered by the Iran war, delivering 2.7% global economic growth — only 0.1 percentage points below Goldman Sachs' previous forecast. Taiwan and South Korea significantly outperformed due to surging AI exports, beating expectations by 8.6 percentage points and 1.9 percentage points respectively, while the United States and the euro area slightly underperformed.

Looking ahead to 2027, the energy price shock is expected to shift from a headwind to a tailwind. Goldman Sachs commodity strategists' baseline forecast shows Brent crude falling to $78 per barrel by the end of 2027, with global LNG prices normalizing in tandem, and the drag from energy prices on global growth shifting from 0.4 percentage points in 2026 to a modest boost.

AI capital expenditure remains the most important growth engine. Goldman Sachs forecasts that global nominal AI investment will rise from $1.1 trillion in 2026 to $1.8 trillion in 2027, with the increment mainly driven by more than $500 billion in increased US hardware spending. AI investment will contribute approximately 0.4 percentage points to global GDP growth, with its contribution to US "true" GDP growth — after adjusting for the statistical undercount from semiconductor investment and chip-related intellectual property exports — estimated at 0.6 percentage points.

On fiscal and financial conditions, the Goldman Sachs GS Financial Conditions Index (GS FCI) has tightened by approximately 50 basis points in the United States and about 30 basis points in developed markets over the past three months, which will exert a moderate drag on growth in coming quarters. The marginal effect of fiscal expansion is also fading, with the main exception being Japan — where consumption tax cuts, increased defense spending, and the Takaichi government's investment plans are expected to deliver a 0.7 percentage point boost to Japan's GDP growth.

Among major economy forecasts, Goldman Sachs holds a relatively optimistic view on US economic growth, projecting 2.4%, above the consensus of 2.2%, while being more pessimistic on Europe, forecasting 0.9%, below the consensus of 1.3%, mainly due to tightening financial conditions and elevated energy prices that will begin to manifest this winter. Goldman Sachs forecasts China's growth at 4.5%, slightly above the consensus of 4.4%.

Three Major Downside Risks: Energy, Bond Markets, and the AI Cycle

Goldman Sachs explicitly characterizes 2027 global growth risks as skewed to the downside and enumerates three primary channels.

Renewed escalation of the Iran situation. Beyond its baseline forecast, Goldman Sachs commodity strategists assign greater weight to an upside scenario in which intensified shipping attacks, damaged oil infrastructure, and a more persistent risk premium could push oil prices to $132 per barrel. Should this scenario materialize, the energy price shock would continue to drag on global growth in 2027, and unlike 2026, financial conditions and fiscal policy would no longer be able to provide the same degree of offset.

Bond market turbulence. Developed market yield curves are currently about 85 basis points higher than at the start of 2026. Goldman Sachs estimates that if this increase persists, it would cumulatively drag GDP by approximately 0.5% through housing, durable goods, and corporate investment channels. France's fiscal risk is particularly prominent — the 10-year French government bond (OAT) yield stands about 150 basis points above German bunds, and fiscal health indicators have flashed red. Goldman Sachs expects that substantive fiscal consolidation discussions will not begin until after France's April 2027 presidential election and June parliamentary elections conclude, but markets may apply pressure earlier, creating a larger growth drag.

Weakening AI investment impulse. Goldman Sachs notes that hyperscaler stock price reactions to signals of higher capital expenditure during earnings calls have shifted from positive in 2024-2025 to slightly negative in 2026, as the market begins to worry about overinvestment. Additionally, the magnitude of upward revisions to hyperscaler capital expenditure during the third-quarter earnings season has slowed, indicating that the peak of the AI investment cycle is coming into increasingly clear view.

Regarding AI's impact on the labor market, Goldman Sachs has already observed early signals: in non-manufacturing industries, the adoption rate of AI in routine business functions shows a statistically significant negative correlation with employment growth and a positive correlation with the unemployment rate — a relationship that was not significant at the start of the year. Goldman Sachs' baseline forecast holds that AI's shock to the labor market will be concentrated mainly in 2028-2029, but if the economy turns down, companies may cut hiring targets more aggressively, accelerating this timeline.

Inflation: Progress Expected, but Upside Risks Remain

Inflation in 2026 exceeded expectations, primarily due to energy price increases triggered by the Iran war, with global headline inflation ending at 3.7% on a fourth-quarter year-over-year basis, 1.3 percentage points above Goldman Sachs' previous forecast.

Looking ahead to 2027, Goldman Sachs believes the conditions for inflation to subside are taking shape. In the United States, the tariff passthrough effect — currently still contributing about 40 basis points to core PCE year-over-year growth — is expected to fully exit the year-over-year comparison next spring, and combined with the fading of the Iran war inflation shock, Goldman Sachs forecasts US core PCE inflation will slow from 3.2% at the end of 2026 to 2.4% by the end of 2027.

However, inflation may remain somewhat sticky in early 2027. Goldman Sachs cites three reasons:

The passthrough effect of higher energy prices will persist into next year, particularly in Europe, where for example European airline fares have not yet fully reflected rising fuel costs;

Global memory price forecasts were revised up again in the last earnings season, which will provide an additional boost to core inflation, with the United States particularly affected;

Upstream cost pressures have risen and broadened, and historical patterns suggest this will keep inflation overshoot risks elevated through next spring.

Goldman Sachs also notes that if the Iran situation escalates again, according to its commodity team's adverse scenario estimates, 2027 headline inflation would be 0.9 percentage points above baseline, and core inflation 0.2 percentage points higher.

Monetary Policy: Rate Hikes Nearing an End, Rate Cut Path Becoming Clearer

Goldman Sachs expects the Federal Reserve to hike rates once each in December and next March, then begin cutting rates in December 2027, with three more cuts in 2028, bringing the terminal rate to 3.25%-3.5%. Goldman Sachs sees US rate risks skewed dovish, as US inflation drivers are more clearly temporary and the US has the greatest exposure to a downturn in the AI cycle.

Regarding the European Central Bank, Goldman Sachs expects a final rate hike in December, followed by the start of normalization cuts in the fourth quarter of 2027, with a terminal rate of 2.25%. The Bank of England is expected to deliver its final hike to 4.25% next February, then hold steady, with the timeline for cuts to a 3.25% terminal rate pushed back to 2028. Goldman Sachs' forecasts for both the ECB and BOE are more dovish than market pricing.

Japan is the main exception. Goldman Sachs expects the Bank of Japan to raise rates by another 25 basis points at its December monetary policy meeting, and to continue hiking in March and June next year, reaching a terminal rate of 2.0%, citing upside inflation risks and pressure on the yen from high global interest rates.

In emerging markets, Goldman Sachs maintains a broadly dovish stance, expecting most central banks in Central and Eastern Europe, the Middle East, Africa, and Latin America to cut rates in 2027, while Asian rates remain roughly flat or edge slightly higher.

Market Outlook: Positive Returns Expected, but Volatility Risks Rising

Goldman Sachs' baseline forecast shows both equities and bonds delivering positive returns in 2027, with commodity returns close to zero. But Goldman Sachs simultaneously warns that the challenges facing markets will be more severe than the macro economy itself.

For equities, Goldman Sachs expects S&P 500 earnings growth to slow from 36% in 2026 to 11% in 2027 — still solid, but the deceleration means market concerns about the AI investment cycle peaking will gradually intensify.

Goldman Sachs notes that the AI investment boom has contributed far more to corporate earnings and market capitalization than to GDP growth — the S&P 500 earnings-to-GDP ratio has reached a record high — and once the investment impulse fades, the market will face questions about whether this elevated earnings share can be sustained. On regional allocation, Goldman Sachs recommends overweighting the United States and Japan, neutral positioning in Asia ex-Japan and emerging markets, and underweighting Europe.

For credit markets, Goldman Sachs expects credit spreads to widen further in 2027, with US high yield underperforming, and tail risks among weaker borrowers potentially triggering broader financing market turbulence.

For bond markets, Goldman Sachs believes real yields are at near 30-year highs, and bonds' hedging value is gradually being restored. As growth risks rise in the second half of 2027 and central bank hiking cycles near their end, the negative correlation between bonds and equities is expected to re-emerge. Goldman Sachs forecasts the US 10-year Treasury yield will fall to 4.6% by the end of 2027.

For foreign exchange, Goldman Sachs' baseline forecast is a modestly weaker dollar, with the renminbi continuing to appreciate on the back of trade surpluses. If market skepticism about US tech stock "exceptionalism" accelerates, the dollar could see a sharper decline, while the yen would appreciate significantly on safe-haven demand.

On commodities, Goldman Sachs recommends using them as portfolio hedging tools, with European natural gas futures and TTF call options serving as asymmetric hedges against upside energy price risks. Additionally, Goldman Sachs believes that as the market cycle matures, equity index volatility is more likely to rise than fall, and recommends investors consider seeking deeper protection through out-of-the-money put options or replacing equity holdings with long-dated call options.