Input Structuring CN

# GOAL Kickstart - Dovish and De-escalation - Markets embrace a Goldilocks Backdrop
Last week increased expectations of a more dovish Fed ([Exhibit 1](...)), de-escalation of Middle East tensions ([Exhibit 2](...)) and progress in U.S. trade negotiations (including removal of section 899) supported growth pricing across assets. [Our Economists pulled forward their forecast for the next cut to September](...) and reduced their terminal rate forecast to 3-3.25%. Indeed, our PC1 "Global growth" factor improved last week despite deteriorating macro surprises, especially in the US with [Personal spending](...), [New home sales](...), and [Consumer confidence](...) below consensus last week ([Exhibit 3](...)). With greater expectation of a more dovish Fed, this created a "Goldilocks" regime and supported risky assets and a large re-set in cross-asset implied vol, which boosted risk appetite (our [Risk Appetite Indicator](...) rebounded to 0.3, [Exhibit 10](...)) and US equities to a new all-time high. This Thursday's labour market data could be critical to sustain the positive momentum - [our economists expect 85k for non-farm payrolls, below consensus of +113k](...). The bullish growth repricing was broad geographically, with equities outperforming bonds and cyclicals outperforming defensives across regions ([Exhibit 4](...)). On the other hand, [the rally in USD HY has been led by defensive sectors](...) and there has been more regional dispersion in inflation pricing.

Expectations for equity fundamentals have been under less pressure recently. Consensus EPS revisions have turned less negative in most regions over the past month, and have turned positive for the US market ([Exhibit 5](...)). The Q2 earnings season will be a key focus for investors - our [US strategists note a relatively low bar to beat (consensus expects 4% EPS growth in 2Q, down from 12% in 1Q) but expect important insights on how companies are adjusting to increased tariff rates](...). Implied equity correlations have been falling since April across markets, reflecting investor expectations of more dispersion into the earnings season and fading macro risk - the S&P 500 and Nasdaq 100 implied correlations are now at the 17th/10th percentile since 2020 respectively - this is much in contrast to EURO STOXX 50 ([Exhibit 6](...)). Reverse dispersion trades appear attractive as a macro hedge against a larger growth backdrop deterioration over the summer.

Our asset allocation remains neutral but focused on [diversification both across regions and styles](...) into the summer. We also [continue to recommend option hedges](...): with markets pricing a more "Goldilocks" backdrop, we think USD HY puts/CDS payers looks attractive to hedge a stagflationary shock, while rates payers look attractive to hedge a more reflationary rebound. We also highlight calls/risk-reversals on Euro Area Banks (SX7E) and collars on MSCI EM to hedge a reversal in positioning.

# Dovish and De-escalation - Markets embrace a Goldilocks Backdrop

#### Exhibit 1: Markets are pricing more dovish Fed
Option-implied probability of Fed rates over the next 12 months
[![1. Markets are pricing more dovish Fed. Data available on request.](https://marquee.gs.com/content/research/en/reports/2025/06/30/895a63a0-3ba4-4a0f-bc97-2521b14148bc/jcr:content/report/chapter_2/exhibitGroup_1/exhibit_1.img.png)](...)

#### Exhibit 2: Markets have priced lower geopolitical risk
[![2. Markets have priced lower geopolitical risk. Data available on request.](https://marquee.gs.com/content/research/en/reports/2025/06/30/895a63a0-3ba4-4a0f-bc97-2521b14148bc/jcr:content/report/chapter_2/exhibitGroup_1/exhibit_2.img.png)](...)

#### Exhibit 3: Last week, markets priced higher growth expectations despite worsening macro surprises
[![3. Last week, markets priced higher growth expectations despite worsening macro surprises. Data available on request.](https://marquee.gs.com/content/research/en/reports/2025/06/30/895a63a0-3ba4-4a0f-bc97-2521b14148bc/jcr:content/report/chapter_2/exhibitGroup_1/exhibit_3.img.png)](...)

#### Exhibit 4: Growth repricing was broad across regions
Average 1y z-score of equity vs. bonds, cyclical vs. defensives, credit spreads, 10y inflation swap
[![4. Growth repricing was broad across regions. Data available on request.](https://marquee.gs.com/content/research/en/reports/2025/06/30/895a63a0-3ba4-4a0f-bc97-2521b14148bc/jcr:content/report/chapter_2/exhibitGroup_1/exhibit_4.img.png)](...)

#### Exhibit 5: Earnings revisions have improved across most regions and turned positive in the US
1-month FY2 EPS revision
[![5. Earnings revisions have improved across most regions and turned positive in the US. Data available on request.](https://marquee.gs.com/content/research/en/reports/2025/06/30/895a63a0-3ba4-4a0f-bc97-2521b14148bc/jcr:content/report/chapter_2/exhibitGroup_1/exhibit_5.img.png)](...)

#### Exhibit 6: Implied correlation has come down since April
3m 50-delta implied correlation
[![6. Implied correlation has come down since April. Data available on request.](https://marquee.gs.com/content/research/en/reports/2025/06/30/895a63a0-3ba4-4a0f-bc97-2521b14148bc/jcr:content/report/chapter_2/exhibitGroup_1/exhibit_6.img.png)](...)