Goldman Sachs strategists believe the market's current pricing of the rate hike path is overly pessimistic, and with potential inflation relief, a year-end window for a broad-based asset rally exists.

On September 17, Dominic Wilson, senior advisor to Goldman Sachs Research, and Josh Schiffrin, global head of risk, stated on a Goldman Sachs podcast that the roughly four cumulative rate hikes currently priced by the market are "clearly excessive," with both agreeing the actual number is more likely to be two. Wilson explicitly noted that when weighing a probability distribution between "two" and "six" hikes, the answer "clearly tilts toward two."

Both strategists pointed to oil prices as the critical variable determining the final rate path, adding that a substantial decline in oil would create conditions for synchronized gains across multiple global asset classes. Meanwhile, the bond market has already priced in significant negative factors, with long-end real yields at rare multi-decade highs, while equities have shown surprising resilience amid surging oil prices, sharply higher yields, and AI-related uncertainty. Wilson believes that with short-term uncertainty declining after the Fed's latest meeting, the current moment represents one of the clearest bullish trading windows in the near term.

Rate Hike Expectations Peaking: 'If Forced to Pick a Number, It's Two'

Against the backdrop of a sharp rebound in energy prices, the rapid escalation of inflation expectations is reshaping monetary policy prospects. The market has priced in four Fed rate hikes, but Goldman strategists argue this forecast may be too aggressive. Schiffrin noted that the oil surge has been the biggest market surprise this year, continuously pushing up inflation expectations and leading to increasingly aggressive pricing of the rate path. He said the market is pricing a full tightening cycle of roughly four hikes, but he personally doesn't believe that number will ultimately be reached. If asked for a specific forecast, he leans toward two. Wilson echoed this view, suggesting the base case is "one more hike in October, then a prolonged pause." He pointed out that while global markets—including the Fed, ECB, Japan, and Canada—have priced in nearly four hikes, the actual risk is that central banks may under-deliver. "If you ask me whether it's two or six, I'd say two is far more likely," he said.

Bond Market Has Fully Digested Negatives, Long-End Real Yields Attractive

Despite recent concerns over fiscal deficits, inflation persistence, and capital competition, Schiffrin believes the bond market's pricing structure is now completely different from the past decade. With the 10-year Treasury yield above 5% and the 30-year real yield exceeding 3%, he noted that such levels of coupon and real yields haven't been seen in a considerable time. Schiffrin argues the bond market has already absorbed a large amount of negative factors, making it increasingly attractive, but a reversal still requires a catalyst—the most likely being a decline in oil prices. Wilson analyzed the structural drivers of higher real rates: AI investment-driven corporate financing demand expanding alongside fiscal deficits, intensifying capital competition, while resilient economic growth slows the pace of inflation normalization, further supporting higher policy rate expectations. He said that until these financing dynamics and growth narratives change materially, the scope for significant yield declines is limited. However, he noted that if the AI capex cycle turns or an unexpected downside growth shock occurs, long-end yields could fall substantially—though neither scenario is in Goldman's base case.

US Equities Show Resilience, 'All-Asset Rally' Window Needs Oil Cooperation

On risk assets, Schiffrin said US equities have performed markedly better than expected despite oil spikes, sharply higher yields, and AI regulatory uncertainty. He remarked that the market has been quite resilient, partly reflecting the massive capital expenditure cycle and strong real economic growth. Wilson offered a more forward-looking framework, arguing that the market has accumulated substantial pessimistic pricing—four rate hikes, rising real yields, and oil above $100 are all reflected in prices. This makes "the path to relief from here much easier to see." He described the current moment as "the clearest long-side trading window in the near term, not as good as late July, but with a similar feel." For the highest-conviction trades into year-end, Schiffrin outlined three directions: first, US dollar strength, supported by the Fed's relatively hawkish stance and US economic leadership; second, an "all-asset rally" opportunity if oil declines after the midterm elections, "but it needs falling oil as a catalyst"; and third, continued focus on the long-end's high real yield attractiveness from a medium-to-long-term perspective. Wilson said that given current rate pricing levels and multiple paths to inflation relief, he is increasingly confident in the direction of rate pricing corrections before year-end and prefers to participate through low-cost option structures.

Full Interview Transcript

Tony Pasquariello: Welcome to today's discussion, Dominic and Josh, great to have you. Let's start with the Fed. At the start of the year, markets expected several rate cuts, but now it looks like the year will end with several hikes. Josh, fully acknowledging the difficulty of forecasting, where do you think this hiking cycle ultimately ends?

Josh Schiffrin: I think beyond just yesterday's single Fed hike, given the overall tone of the press conference, there should be more. The market is currently pricing four hikes. I believe oil prices will be a very critical determining factor. Looking back at this year, the biggest surprise has been the sharp rise in energy prices. Oil briefly fell as conflicts eased, but then climbed again, back above $100. I think this has had a major impact on the inflation outlook—after a series of inflation shocks, the market might have started seeing a path back to 2%, but this energy price shock has pushed headline inflation back up, and the impact is significant. The market is heavily betting on a full hiking cycle—four hikes. Personally, I don't think that number will actually be reached, but the market clearly...

Tony Pasquariello: Very cautious. So you think it'll be two to three total?

Josh Schiffrin: Yes, two to three. If I had to give a specific number today, I'd say two.

Tony Pasquariello: So the hiking cycle ends this year? Dominic, what's your view?

Dominic Wilson: Our base case is: one more hike in October, then a prolonged pause. Of course, as Josh said, there are many uncertainties that could affect the path, and the distribution is quite wide. I think two is a good anchor, but with a slightly higher probability skew to the upside. If you ask me whether it's more likely to be two or six, I'd clearly say two. I believe the market has priced in a considerable risk premium for a full hiking cycle, and our base case suggests the actual outcome will likely be less than what's priced.

Tony Pasquariello: Josh, let me come back to you. Let's talk about the bond market. The yield curve has flattened this year, but most of the recent discussion and concern has been at the long end. Do you have a clear view on the future shape of the yield curve?

Josh Schiffrin: I don't have a particularly strong view on the curve shape. But a few things are worth noting: despite all the talk about fiscal deficits, the driver is largely from the short end—the market has repriced monetary policy expectations, and the spot market has done a lot of the digestion. Of course, there's heavy pessimism, with various narratives—strong economy, fiscal deficits, inflation concerns. But with the 10-year at 5% and the 30-year real yield above 3%, near-term moves may be hard to predict, but I'd point out: in terms of the coupon offered, the bond market's structure is completely different from the past decade. Especially at the long end, the real yields on offer are quite substantial. So I think the bond market has digested a lot of negative news at this level.

Tony Pasquariello: Sounds like you both think that despite the complexity, prices already include a significant risk premium, including in fixed income. Is that right?

Josh Schiffrin: Yes. I think a genuine reversal needs a catalyst. The most likely one is falling oil prices, which would bring some relief to the market. Once such a catalyst appears—something more bullish—I think buyers will return, because from a longer-term perspective, valuations are more attractive than they've been in quite some time.

Tony Pasquariello: I want to spend more time on fixed income. Looking back, we can explain yields from multiple angles: debt and deficits, of course inflation (now above target for 66 straight months), and capital competition. A more moderate factor is that nominal growth has been very strong. But how concerned are you about the persistence of these factors?

Dominic Wilson: This is exactly what you asked Josh earlier, and I think it's important to separate these factors. In my personal ranking, the rise in AI and corporate financing demand, combined with persistent fiscal deficits, is a key driver of higher real yields—the capital competition narrative. The cyclical counterpart: economic growth is quite resilient, and inflation's path back to target is slow or even stalled, so pressure to maintain or even raise policy rates has re-emerged. Then there's the inflation layer: energy price shocks, widespread concerns about oil price pass-through, and worries that policy intervention might suppress yields, all seeping into market pricing. From a deeper structural perspective, I think the rise in real rates largely stems from capital competition and growth resilience. So the room for change lies in: as Josh said, some inflation relief could help weaken the current Fed tightening cycle; oil price declines could also provide some relief at the long end through this channel. But I do think the high real rate structure we're seeing is deeply rooted in these financing dynamics and growth narratives. So without a material change in these underlying factors, expecting a significant yield decline merely from fading inflation risks is hard to achieve. For a meaningful yield decline, we might need the AI investment boom to cool, or a substantial downside growth surprise beyond our current forecasts. Otherwise, we'll be in a persistently high-yield environment, and over the next 6-12 months, the risk on the real side still leans toward financing pressures continuing to support or push yields higher.

Tony Pasquariello: I want to ask you both about risk assets. Dominic, let's start with you. July saw significant market volatility, coming out of it feeling a bit cleaner, with some aftershocks in August. But AI-related headlines and volatility seem relentless. What's your current view on risk assets?

Dominic Wilson: As you said, it's been tricky recently. I feel like we've been circling the same set of risks for a while—AI, rates and yields, and oil and energy risks from the Iran conflict. At least two of these three risk categories have genuine high uncertainty, and sometimes all three coincide. There was that brief window at the end of July you mentioned, where things seemed to clear up, the market did reset higher, and held at least some of those gains. But the ebb and flow of these risk factors keeps the situation complex. I think the current structure is: these risks haven't disappeared, and uncertainty ranges remain wide in several areas, especially geopolitical conflict and energy price risk. AI uncertainty also falls into this category for me. However, returning to the rates issue we discussed earlier, I think we've moved pricing and concerns to a different position: AI concerns have been more fully digested, key market sectors have seen some de-bubbling, and earnings remain solid—that's been a source of continued confidence. We've priced in four Fed hikes, real yields have risen, oil is priced above $100. So the distribution of pricing has clearly shifted, and the path to relief from here is easier to see. So, having gotten through the Fed meeting, with the Fed coming out hawkish and anchoring the back end of the curve, maybe the picture is a bit cleaner again. But the degree of difficulty is still high. I tend to use the currently low index volatility to protect myself, whether downside protection or upside exposure. Overall, this is the clearest picture we've seen on the long side in the near term—maybe not as good as late July, but with a similar feel. Coming out of this FOMC meeting, even against a hawkish surprise, things seem a bit clearer.

Tony Pasquariello: Sounds like you want to buy some call options.

Dominic Wilson: Yes, I think the short-term setup is good, and the related option pricing looks attractive.

Tony Pasquariello: Josh, what's your view?

Josh Schiffrin: I think the stock market has absorbed quite a few shocks and performed quite well—sharp oil gains, sharply higher bond yields, and a steady stream of AI headlines. Navigating through all that, the market has largely maintained a range-bound pattern. I find the equity market's resilience quite impressive. Of course, earnings are part of it, but it's also likely similar to the scenario you've described—a bumpy period through various headwinds, then a resumption of the uptrend once some headwinds dissipate. It might also reflect the strength of the underlying economy: we're in a massive capital expenditure cycle, real economic growth is very strong, which means equities can absorb some turbulence because we're still in a broader macro uptrend.

Tony Pasquariello: Dominic, I want to return to the macro level. Ultimately, many judgments come back to the resilience of the US economy. How do you see growth evolving from here?

Dominic Wilson: Our forecast is roughly a continuation of the status quo, with growth around 2%. Overall, the growth picture is quite solid, impressively resilient to various shocks. Growth continues, and the labor market continues. On the margin, considering the oil price shock earlier this year, growth has actually improved slightly, which is genuinely surprising. The labor market has also performed very differently from what people expected at the start of the year, with unemployment actually declining over time. Looking at the composite ISM index—these surveys have their limitations, of course—it's been slowly recovering in recent months. Overall, things have improved modestly. Of course, the economy has recently faced higher energy prices, not just oil but also natural gas and diesel; rates are also rising, and financial conditions have tightened. But the tightening hasn't yet reached levels that would genuinely worry about changing the growth outlook. Of course, new pressures have emerged, and if they continue to accumulate, the next quarter or two could be more challenging. But if what we're seeing is the full extent of the pressure, or if we get some relief, then the growth outlook looks quite good. I think, in a sense, the challenge is: as a market overall, we're not actually that concerned about growth—most of the pessimistic pricing has been corrected, we have some underperformance in cyclical sectors, but not much, and most cyclical growth pricing indicators remain quite robust. In yesterday's Fed SEP, I noticed something about the balance of growth risks: no committee member saw risks as skewed to the downside, which is historically relatively rare. It gives me a kind of "Lloyd Blankfein feeling"—"I haven't felt this good since 2007."

Josh Schiffrin: You really look at that level of detail?

Dominic Wilson: It's quite unusual, so I do have a slight nagging unease—we're all quite comfortable with the growth outlook. The market occasionally shows some concern, but overall hasn't really shaken its core view. So the disagreements are more about pricing levels, and the underlying picture looks good.

Tony Pasquariello: Final market question, one answer each. There's less than four months left in the year. Between now and year-end, what's your highest-conviction theme or position?

Josh Schiffrin: With the market this volatile, it's hard to name one clear theme. Let me mention a few directions I'm watching. First, the dollar—it's been choppy, but Fed hikes, a clearly hawkish press conference, combined with the US economic leadership and the AI narrative, could create favorable conditions for the dollar, especially given the strong US economy and the Fed seeming to respond actively. Second, if we get through the midterms and oil prices see downside relief, I think it could open up a year-end "broad risk-asset rally" trade—but I think it needs falling oil to catalyze that move. Additionally, as I mentioned earlier, from a medium-to-long-term perspective, I keep focusing on long-end real yields—I think a 30-year real yield above 3% is at quite an attractive level, and it's worth serious attention.

Tony Pasquariello: Dominic?

Dominic Wilson: As we've mentioned, given these major risks, I still view the market as a month-by-month process. But now I'm looking at the rate pricing we started with: the Fed is approaching nearly four cumulative hikes, the ECB over four in a new cycle, Japan near four, and Canada over four. So from the center of the distribution, these hikes should all materialize—of course, this pricing isn't unreasonable or off-base. But I do think it's easy to see a scenario where, by year-end, the market is less concerned about the need for continued tightening, whether through oil or inflation relief—there could be many different paths. Of course, the market has previously thought there would be fewer hikes, but then kept drifting toward tightening. But as I look at these numbers, I'm starting to feel the pricing is approaching an extreme in one direction. As I said earlier, two hikes or six hikes—which side is the risk? For me, the answer is quite clear. So I'm starting to get increasingly interested in this direction.

Tony Pasquariello: Final lighter question—I think this is interesting: if you could resurrect one obsolete tech product that's disappeared, what would you choose? I'll go first.

Dominic Wilson: Go ahead.

Tony Pasquariello: I want my BlackBerry back. I really loved the BlackBerry. It coexisted in my hands with a smartphone, and typing emails on it was always my favorite. It was taken from us, and it completely died. Of course, maybe after a week you'd realize it wasn't that great, but I still want my BlackBerry back.

Dominic Wilson: I completely agree. I actually hadn't thought of that answer, but the moment you said it, a strong wave of nostalgia hit me. It's a real shame it disappeared. For me, what comes to mind is more music-related. My youngest daughter is really into vinyl records now, so vinyl is back. But I'm thinking of the big speakers, mixtapes, cassette Walkmans, and that feeling of dubbing from one tape to another on a dual-deck recorder. While I have a hint of nostalgia for those, I think if I actually went back to rotary phones, I'd be in pain—dialing is too slow. But I also feel it was a very ritualistic experience, that very old-school, embedded-in-daily-life feeling. More importantly, it raised the threshold for contacting others, perhaps making human interactions more meaningful.

Josh Schiffrin: Yeah, I sometimes think—I used to have an old landline at home, which was the new tech of its time. That's how I grew up—everyone waiting their turn to use the phone, finding a quiet place to talk. Now with mobile phones, everything's different, and sometimes I do miss those days.

Tony Pasquariello: That's all for today. Josh, Dominic, thanks for joining.

Dominic Wilson: Thank you.