Goldman Sachs The Markets

“Stocks Are Still Very Undervalued”

Anshul Sehgal, Global Co-Head of Fixed Income,
Currency and Commodities, Global Banking &
Markets Chris Hussey, Host, Goldman Sachs
Research
Date of recording: July 31, 2025

Chris Hussey: This is The Markets. I'm Chris Hussey.

Today is Thursday, July 31st, and we're coming to you
from the Goldman Sachs trading floor with Anshul Sehgal,
global co-head of Fixed Income, Currency & Commodities
within Goldman Sachs Global Banking and Markets
division. Anshul, thanks for joining us.

Anshul Sehgal: Great to be here. Thank you for having

me.

Chris Hussey: All right, so I got to go to my notes

because we had you on last time, just ahead of the May
Fed meeting and the byline was the Fed does nothing, rates
remain high, and uncertainty abounds. What does this all
mean for investors? So a little less than three months
later, did nothing change? What's your take on the

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meeting?

Anshul Sehgal: Yeah, so uncertainty continues to

abound, though the world has turned and things are
different today. There is more clarity in terms of where the
tariff train is going. The economy held up exceptionally
well. Last time when we met, Q1 GDP was a negative print.
Q2 GDP nicely rebound as we learned this week. All in all,
we are more optimistic.

We were plenty optimistic when we met last, but we

continue to be very optimistic on the intermediate-term
trajectory for the global economy. Like, we expect that
there is a 30% chance that we go through a soft patch in
H2 of this year. If you look through that, in 2026, we are
seeing nothing but, like, good news for the global economy.
Like, you've got Germany fiscally expanding because of
defense. You've got the Big Beautiful Bill, which has the
potential, especially in conjunction with AI and robotics, to
unleash a credit boom domestically in addition to the fiscal
expansion that we've witnessed over the last four years.

And similarly, China, to continue to hold onto its perch in

AI and robotics, is already expanding in both credit and

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fiscal terms. So the combination of those things globally
essentially mean that you're going to get, like, asset price
appreciation in the intermediate term.

Now, in the very near term, because tariffs are on

corporates if they absorb the losses. The number we're
talking about $250-300 billion annualized based on where
things are falling. That's about 1% of GDP, which is a non-
trivial amount. That, if it's absorbed by the corporates,
would be an impact on stocks. And if it's absorbed by the
consumer, it will impact consumption in the near term. It
is a one-time tax, though.

So once it's factored in and starting early next year, once

you've got the bonus depreciation that's in the Big
Beautiful Bill, you've got the Social Security tax benefits,
and the lower taxes on tips, the combination of those
things are very powerful for the US economy in our view.

Chris Hussey: Let me unpack a couple of those things

because you said there's a 30% chance of a soft patch,
maybe even you called it a recession, in the second half of
this year but 2026 is going to look fine. And then you had
this one-time sort of impact from tariffs, but that's a one-

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time impact so it's not a sustained impact necessarily on
inflation. And we had two dissenters here. Two in the Fed
who thought we should be cutting rates now. Unpack that
a little bit. Are these two dissenters that you're sort of
saying, "Yeah, that makes a lot of sense"? Is there any
politics involved? How are you thinking about it?

Anshul Sehgal: Well, there might well be politics

involved. I'm not going to go there. But that said, if the
federal government took up taxes in any other way, that
would be fiscal contraction and then the Fed would ease.
This is similar except it comes with a one-time price
adjustment -- so inflation -- but a one-time inflation, not
necessarily sustained inflation. And then the question or
the debate becomes whether the Fed should see through it
or whether the Fed should adapt policy based on that.

Now, what we learned yesterday from Chair Powell is that

he -- it's nuanced because he did not say that he's not
willing to look through it. He might well look through it.
What he's saying is he'd like to wait and see the cumulative
impact of all of the things that have gone on in the last
three months on the domestic economy, which is a fine
stance to have. But then you look at Governor Waller and

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Governor Bowman, their view is that the Fed should get
ahead of this taxation that is coming down the pike and
should start easing right away.

I think a divisive viewpoint is good. Only time will tell

where things end up. My personal view is that we're
definitely not getting a recession in H2 of this year. The
economy will muddle through. And then starting towards,
like, say, early Q4, CapEx will take another leg higher
because there will be deregulation, especially in the
banking industry. That's already underway. The
combination of those things will be so much more powerful
than the negative impacts of tariffs that, if the Fed does not
cut in the next few months, odds that they cut in the
ensuing six are quite low.

Chris Hussey: All right, so this is The Markets. Let's

shift to the markets. Let's shift to the bond market.
Diversity of opinion in the economy, diversity of opinion in
the markets. What are you seeing in the markets here?
The reaction to the Fed as well as just the broader market?

Anshul Sehgal: Yeah, so super interesting time in

markets. Like, Powell's speech yesterday kind of put a

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marker in how the dollar had been trading. So the dollar,
going back to February, late February, before even
Liberation Day, was on a downswing. The dollar was
weakening versus every other currency. Gold was ripping.
Silver was doing really well. All metals were doing really
well, some because of global growth, some because of the
dollar weakening.

Yesterday marked a change in that. So if you compare the

dollar to the yen, it's crossed the 200-day moving average.
If you compare the dollar to the euro, like, the euro's lost
ground, like, 300 basis points of ground in just a few
trading sessions. FX markets generally trend until there's
a phase shift, so this is very meaningful. Like, if you look
at the ECB, they cut because their economy was slowing in
the near term, but they also predicated some of those cuts
on the Fed being easy. And now the Fed's basically saying,
like, "No, we want to take a wait-and-watch approach," in
which case, like, the trend could reverse very meaningfully
so that's super exciting. And I think this plays out much
more in the currency space than the rates space.

There's still a fair number of cuts priced in the rates curve,

especially out to end of 2026. Only time will tell whether

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they materialize or not. For me, I think that's too many
cuts in the price there. I don't see this Fed cutting very
many times. Of course, the next Fed, we'll see how dovish
they are. But my expectation is that they will not be able
to cut very much. Generally what happens is that, once
you get the first few innings of a credit boom, that
inevitably leads to more mortgage origination, which leads
to higher home prices, which leads to inflation. So by the
time the next Fed is in motion in May/June of next year,
my expectation is that inflation is actually going to be
looking like it's on the up drop.

So the combination of those things makes it very difficult

for me to see a Fed that's being excessively easy. But also I
don't see it as a rates story. I see it more as an FX story.

Chris Hussey: So interesting, right? So you have the

Fed sort of holding the ground on rates, the UK not so
much. ECB, though, they did hold the ground on rates as
well. If the Fed were to start cutting, though, in
September, does the short dollar trade come back on?

Anshul Sehgal: If the Fed were to start cutting in

September then you have cross currents in the short dollar

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trade. Obviously, you would expect the dollar to weaken
some quantum. How much really depends on the interplay
of Fed policy. And generally when you get a credit
expansion as well, which we envision for 2026, the
currency weakens.

But then the offset to all of this, on the other side, is AI and
robotics. That is mainly being done in the United States
and in China. So if you want to basically partake in that
as an investor, you have to own American stocks. To own
American stocks, you need dollars. So then there are cross
currents which makes the trade less clean and very
difficult to say which side wins over, but if the Fed were to
hold ground, then the strong dollar trade, both the AI wave
contributes to it and so does Fed policy.

Chris Hussey: That's a great point. All right, we've

talked stocks, bonds, and dollar now. What's your favorite
trade?

Anshul Sehgal: Continues to be long stocks. I think

stocks are still very undervalued. You look at the earnings
that came out in the last 24 hours, they are blockbuster
good. You're looking at two things that are playing out

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right now. Obviously the AI CapEx boom, that's
contributing to GDP today. And conceivably because I'm a
believer in the technology, I suspect over the next five to
ten years it's the AI deployment that will add to GDP. So
definitely long stocks.

Long the dollar. Long carry because rates aren't going

anywhere. So long mortgage basis. Long US treasuries
and asset swap. Short options on rates. Combination of
carry strategies.

Chris Hussey: Good stuff. Okay, so you say stocks are

undervalued but that runs a little counter to some of the
stuff we're hearing about retail investors getting involved
and meme stocks and so forth. Why do you say that?

Anshul Sehgal: Yeah, so that's a super interesting

question. If you do bottoms up and look at what
companies are saying how their earnings will be then
stocks look a little rich in terms of PE, in terms of equity
risk premium, and all of those metrics. For us as macro
traders, we're looking at it top down. The way we're looking
at is the US government's going to fiscally expand by
another 6% this year and 6-7% next year. So just through

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debasement of currency or just, like, any real assist versus
fiat currency should richen by about that much every year.

Then on top of that, if you're looking at a credit boom,

especially a productive credit boom because that credit is
being created and deployed into emergent technologies that
have the potential to change the world, then essentially
what ends up happening -- and that's how we're viewing it
-- is that all of this accrues a lot more to US stocks than it
does to other forms of investment. And when you look at it
top down from that perspective, stocks continue to look
very cheap to us.

Chris Hussey: All right, we're going to head in deep

summer now. What are you going to watch out for in
August?

Anshul Sehgal: Slow markets, illiquid markets always a

problem. Going back over the last five years on this side of
the pandemic, the middle of the year has always had a
wobble. Last year, it was the Japan wobble up to August
5th. So one has to always watch out for that. But other
that, I'm hoping that I get to take time off from work.

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Chris Hussey: I hope you do, too. I will be as well.
Anshul, thanks so much for joining us.

Anshul Sehgal: Thank you again for having me.

Chris Hussey: That does it for this episode of The

Markets. I'm Chris Hussey. Thanks for listening.

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