Is the market too optimistic? Goldman Sachs warns: key indicators have returned to the eve of the 2007 financial crisis!
Current trade policies are becoming clearer, and the market has lowered the pricing of recession risks, leading to a noticeable easing of investment sentiment. This Thursday, the global corporate bond spread narrowed to 79 basis points, the lowest level since the eve of the 2007 financial crisis. Goldman Sachs warns that the market may overlook downside risks due to excessive optimism, including economic slowdown, weakening deflation, and concerns about the independence of the Federal Reserve, and advises investors to maintain necessary hedges in their portfolios
Goldman Sachs credit strategists urge clients to hedge risks, as the global corporate bond yield spread narrowed this week to its lowest level since 2007.
According to Bloomberg indices, as of Thursday this week, the yield spread of global investment-grade corporate bonds has narrowed to 79 basis points, the lowest level since July 2007, just before the outbreak of the global financial crisis.
On July 31, Eastern Time, a team led by Goldman Sachs Chief Credit Strategist Lotfi Karoui released a report stating that compared to March and April, the current trade policies are significantly more predictable, allowing the market to substantially lower the pricing of recession risks. This policy clarity helps investors reassess risks, pushing credit spreads back to pre-financial crisis levels.
However, Goldman Sachs warns the market that market participants should not overlook potential risk factors due to the current optimistic sentiment.
Goldman Sachs strategists pointed out in the report that despite improved market sentiment, there are still enough sources of downside risk in the market that warrant maintaining a certain level of hedging positions in portfolios:
“These risks include the possibility of economic growth falling further below expectations, a potential weakening of deflationary trends, or renewed concerns about the independence of the Federal Reserve, which could trigger a significant rise in long-term yields.”
Additionally, despite the continued narrowing of credit spreads and the S&P 500 index reaching a historic high this week, indicating market optimism, Federal Reserve policymakers have not signaled an imminent rate cut, indicating that the Fed still needs more data to ensure that inflation risks do not persist. Furthermore, the Fed also lowered its expectations for U.S. economic growth this week, citing a slowdown in economic activity.
Nevertheless, Goldman Sachs economists still expect the Fed to cut rates by 25 basis points in September, October, and December, with two more cuts anticipated in 2026.
Goldman Sachs added that while negative news related to tariffs is no longer the main driver of risk sentiment, the impact of tariffs on different segments of the supply chain will lead to performance divergence among companies, becoming a new source of market risk
