Goldman Sachs' Delayed Fed Rate Cut Forecast and Market Implications

Goldman Sachs has significantly revised its Federal Reserve interest rate cut forecast following softer-than-expected U.S. jobs data, shifting from an earlier expectation of rate reductions beginning in March 2026 to now projecting two 25-basis-point cuts in June and September 2026 [1]. This more hawkish monetary policy outlook carries substantial implications for equity market valuations and sector rotation strategies.

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Goldman Sachs’ chief U.S. economist David Mericle stated: “After the latest payrolls report, we see the Fed waiting until mid-year to cut as inflation falls toward target and the labor market finds its footing” [1].

Metric	Previous Forecast	Revised Forecast
First Rate Cut	March 2026	June 2026
Second Rate Cut	June 2026	September 2026
Fed Funds Rate (end 2026)	Lower	3.00%-3.25%
12-Month Recession Probability	30%	20%

The revision was driven by “meaningful progress on inflation that was masked by a one-time boost from tariffs,” alongside a labor market that, while stabilizing, remains vulnerable to further softening [1]. The December 2025 non-farm payrolls report showed only 50,000 jobs added, below the Dow Jones forecast of 73,000, while the unemployment rate unexpectedly fell to 4.4% from 4.6% [2][3].

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A prolonged higher interest rate environment directly impacts equity valuations through elevated discount rates applied to future cash flows. The Federal Reserve’s more measured approach to easing—projecting only one rate cut in 2026 versus market expectations of two—creates a divergence that has introduced notable uncertainty [4].

Historically, rate cut pauses have proven beneficial for equities. Analysis of the 280-day rate cut pause in the previous cycle showed the S&P 500 advancing 13.1% during such periods [4]. However, the current pause faces unique challenges:

• Data Disruption
  : A government shutdown-induced data drought has complicated the Fed’s decision-making process [4]
• Inflation Expectations
  : The 10-year breakeven inflation rate rose to a 1.5-month high of 2.296% in early January, signaling potential inflationary pressures [3]
• Yield Curve Dynamics
  : Bond markets have reflected hawkish sentiment, with Atlanta Fed President Raphael Bostic noting “inflation is too high” [3]

Goldman Sachs Research itself projects the S&P 500 to rally 12% in 2026, though this optimism carries caveats. The research notes that “large tech firms with large language model (LLM) exposure have driven US equities sharply higher for three years in a row, achieving an unprecedentedly high share of total US market cap” [5].

This concentration creates elevated volatility potential, as multiple expansion in growth sectors becomes increasingly difficult when risk-free rates remain elevated. The tech sector contributed 7.0 percentage points (40%) of the Morningstar US Market Index’s total 17.4% gains in 2025, with communications adding another 3.1 percentage points (18%)—meaning nearly 60% of market gains came from just two sectors [6].

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The delayed rate cut timeline is reshaping sector leadership and investor preferences. Market data from early 2026 reveals distinct rotation patterns:

Financials have been among the strongest performers, supported by a modest steepening of the yield curve and confidence that net interest margins can remain healthy even if rate cuts are delayed to later in 2026 [7]. Key drivers include:

• Banks lending at elevated rates
• Insurance companies earning higher returns on policyholder premiums
• Improved lending environment following initial Fed cuts [8]

Industrials have found support from renewed political focus on military spending and infrastructure development [7]. The AI buildout has particularly benefited both goods and services portions of the sector, with increased building, materials, and power demand boding well for companies [8].

RBC Capital and other major firms have upgraded this sector to Overweight, citing attractive relative valuations compared to hardware stocks trading at historically high multiples [9]. The sector offers “growth at a discount” relative to other technology-exposed segments.

Energy tends to perform when the Federal Reserve cuts rates slowly, as the sector benefits from continued economic activity and stable demand [8]. However, risks remain if oil prices continue falling on weak demand and supply recovery.

Technology has lagged in early 2026 trading, with particular weakness in memory and storage-exposed stocks as investors reassess capital spending sensitivity and take profits after a strong prior year [7]. Higher discount rates disproportionately impact growth stocks with earnings weighted further into the future.

While real estate typically benefits from lower rates, the sector faces refinancing risks, especially in office properties [5]. The delayed rate cut timeline prolongs this pressure.

These traditionally defensive, dividend-paying sectors have lagged during the rotation, as the delay in rate cuts reduces the urgency to shift into yield-generating assets [4].

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The market environment suggests “selective” participation rather than broad-based enthusiasm [7]. Key observations include:

1. Value-Oriented Shift
   : Signals from technology, crypto, and sector rotation all point toward a more cautious and value-oriented phase [7]
2. Narrow Leadership
   : Indexes may be near record highs, but appetite for growth is cooling [7]
3. Duration Sensitivity
   : Companies with massive immediate cash flows become relatively more attractive than speculative growth names [9]

Goldman economists expect the Fed to make two rate cuts of 25 basis points each in 2026, though this represents a more gradual path than previously anticipated [5]. The research identifies the biggest risks to equity market rallies as “weaker than expected economic growth or a hawkish shift by the Fed”—neither of which appears likely in the near term [5].

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Goldman Sachs’ revised Fed rate cut forecast reflects a nuanced view that inflation progress is occurring but remains masked by temporary factors, while the labor market requires more time to stabilize. For equity investors, this translates to:

1. Valuation Constraint
   : Elevated rates will continue to cap P/E multiple expansion, particularly for growth sectors
2. Sector Rotation
   : Financials, industrials, and communication services are positioned to outperform
3. Growth Sector Pressure
   : Technology and other high-multiple sectors face near-term headwinds
4. Opportunity in Quality
   : Earnings durability and lower sensitivity to economic swings become increasingly valuable

The market appears to be transitioning from the narrow leadership of mega-cap technology companies toward broader opportunities across sectors that have sat on the sidelines during the semiconductor frenzy [9]. Investors should remain agile to shifting macroeconomic signals while prioritizing long-term strategies that leverage historical patterns of sector rotation during extended rate environments.

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[1] Reuters - “Goldman Sachs pushes back US Fed rate cut forecast after soft jobs data” (https://www.reuters.com/business/goldman-sachs-pushes-back-us-fed-rate-cut-forecast-after-soft-jobs-data-2026-01-12/)

[2] CNBC - “‘Goodbye, January’: What the mixed December jobs report means for the Fed” (https://www.cnbc.com/2026/01/09/goodbye-january-what-the-mixed-december-jobs-report-means-for-the-fed.html)

[3] Yahoo Finance - “S&P 500 Rallies to a New Record High on US Economic Data” (https://finance.yahoo.com/news/p-500-rallies-record-high-213816869.html)

[4] AInvest - “Fed Policy Delay and Market Implications: Rate Cut Pauses and Sectoral Reallocations” (https://www.ainvest.com/news/fed-policy-delay-market-implications-rate-cut-pauses-sectoral-reallocations-2601/)

[5] Goldman Sachs - “The S&P 500 Is Expected to Rally 12% This Year” (https://www.goldmansachs.com/insights/articles/the-sp-500-expected-to-rally-12-this-year)

[6] Morningstar - “Markets Brief: When Will We Get a Real Stock Market Rotation?” (https://www.morningstar.com/markets/markets-brief-when-will-we-get-real-stock-market-rotation)

[7] Schwab Network - “Near the Highs, But Not All In: Markets Rotate as 2026 Begins” (https://schwabnetwork.com/articles/near-the-highs-but-not-all-in-markets-rotate-as-2026-begins)

[8] Schwab - “Sector Views: Monthly Stock Sector Outlook” (https://www.schwab.com/learn/story/stock-sector-outlook)

[9] Yahoo Finance - “Sector Rotation: 2 Smart Money Moves for 2026” (https://finance.yahoo.com/news/sector-rotation-2-smart-money-121500546.html)