In its note tracking Europe vs. US divergence, Goldman Sachs analysts warn that a dovish surprise from central banks is needed to sustain the current equity rally.
They note the divergence in Europe and the US, where European macro data is improving while the US shows signs of weakness.
"Our European strategists have shown that activity data is the most important driver for equity performance and that central bank cuts generally help further," the note states. However, despite positive European data, European equities haven't responded as strongly.
Goldman Sachs emphasizes the need for dovish action from the European Central Bank (ECB) at their upcoming meeting. "An actual ECB cut at this week’s meeting and/or some dovish forward guidance is likely needed to support risky assets," they argue.
They add: "In fact, hawkish surprises due to stubborn inflation increase the risk of ‘good’ macro news becoming ‘bad’ news for markets."
The situation in the US is different. Equities have held steady despite weaker data, while safe haven assets like the US Dollar have benefited. Goldman Sachs expresses concern that "risky assets might become more vulnerable to rates indigestion" with potentially weaker US growth data.
To support the equity rally, Goldman Sachs believes a dovish pivot from the Federal Reserve is crucial. They point to "low-risk premia in both equities and credit" as factors that heighten the importance of a dovish Fed stance.