Goldman Sachs pushes Fed rate-cut call to 2027 on strong US jobs data

Goldman Sachs now expects the U.S. Federal Reserve to hold rates unchanged through 2026 and delay the first cuts until June and December 2027, versus prior expectations for cuts in December 2026 and March 2027. The shift follows a stronger-than-expected U.S. jobs report and reflects firmer activity, labor market resilience, inflation pressures from the Middle East conflict, and still-elevated AI-driven demand. Traders are pricing a 75.5% probability of rate hikes by year-end, underscoring a more hawkish policy backdrop.

Analysis

The bigger implication is not “higher for longer” in rates, but a regime shift in cross-asset pricing: if the Fed stays pinned through 2026, duration stops being the marginal macro hedge and inflation-sensitive cash flows regain a bid. That is a headwind for long-duration equities and a tailwind for banks, insurers, and value sectors that can live with sticky front-end yields, while rate-sensitive growth multiple expansion becomes harder to justify unless earnings revisions re-accelerate materially.

The AI angle matters because it creates a second-order squeeze on the equity beta complex: if a meaningful share of capex and cloud spend is being priced on assumed perpetual demand, any slowdown in that incremental spend path can hit semis, data-center supply chain, and the “picks-and-shovels” beneficiaries before it shows up in headline AI revenues. In other words, the market is vulnerable not just to a higher discount rate, but to a slower terminal growth assumption for the AI trade; that combination tends to compress the highest-multiple names first.

Geopolitically, the market may be underestimating how much oil-driven inflation can be tolerated before policy reaction becomes the dominant shock absorber. The more relevant risk window is 1-3 months: if energy prices stay elevated into summer, breakevens and wage expectations can re-tighten even with stable growth, forcing the Fed to lean harder against easing expectations and keeping real rates elevated. That is usually constructive for the dollar and negative for EM beta, especially where external balances are fragile.

The contrarian read is that a prolonged pause is already partly consensus, but the market still treats any eventual cut as a near-term rescue for risk assets. If cuts are pushed out to 2027, the more important question is whether earnings need to do all the work in 2025-26; absent broadening profit growth, index leadership should narrow further and crowded secular growth names could de-rate faster than macro data deteriorates.

Key Decisions for Investors

• Short IWM vs long XLF for the next 1-3 months: small-cap leverage to funding costs and refinancing risk remains more exposed to a prolonged pause, while large banks benefit from sticky front-end yields and limited deposit repricing upside. Use a tight stop if 2-year yields break sharply lower.
• Add to a barbell long in financials and defensives, funded by reducing exposure to high-duration software and unprofitable AI-adjacent names. Target 6-12 months; the risk/reward favors cash-generative sectors if discount rates stay elevated through year-end.
• Consider a put spread on SOXX or a relative short SOXX vs QQQ over 1-2 months. The thesis is that the AI capex premium is vulnerable to even a modest slowdown in incremental demand assumptions, while mega-cap index composition cushions QQQ.
• Long USD/JPY or USD/EM FX basket on a 1-3 month horizon. A delayed-cut regime plus energy-driven inflation risk supports real-rate differentials and tends to pressure high-beta EM currencies first.
• If oil remains firm, express via XLE over XLI rather than outright energy longs. This captures the inflation hedge while limiting single-factor risk if growth slows and crude fails to extend.