Goldman Sachs co-head of global banking and markets Ashok Varadhan expects equity markets to continue grinding higher into year-end, arguing that a volatile July—marked by war re-escalation, Federal Reserve hike jitters, and a sharp unwind in technology momentum—has largely worked its way through the market and left a cleaner setup going forward.

Speaking on a Goldman markets podcast, Varadhan said much of the leverage built up in the AI trade has now been unwound, which he expects to support a higher-quality rally rather than a repeat of last month's volatility. He noted that dispersion between single-stock and index volatility is likely to remain elevated, given how differently the AI theme affects companies depending on their position in the supply chain, though he believes the most extreme readings have likely passed.

On rates, Varadhan pushed back against market pricing for a Fed hike by year-end, saying he expects the central bank to hold steady instead. He pointed to fading tariff-related inflation pressure and the prospect of a Strait of Hormuz deal as reasons price pressures should ease. He added that while AI infrastructure spending can strain resources and stoke near-term inflation concerns, the completed build-out should ultimately prove disinflationary.

On credit, Varadhan said he remains broadly constructive despite heavy new issuance from hyperscalers financing AI investment, noting that any additional risk premium demanded by investors reflects supply dynamics rather than concern about the resilience of the underlying economy.

Regarding currencies, he expressed skepticism that yen intervention will succeed over the longer run, arguing that genuine stabilization requires the Bank of Japan to normalize interest rates properly rather than relying on intervention.

When asked to package his views into a single trade, Varadhan pointed to energy, saying he expects oil to settle back down well below $70 a barrel later in the year. He said this view makes him constructive on front-end US yields—among the market instruments most sensitive to changes in Fed policy expectations—and reinforces his broader thesis that markets can participate in both AI-driven productivity gains and a resilient economy.

His overarching advice was to stay invested, a repeat of the view he expressed on the same podcast in the fourth quarter of last year. He identified the upcoming jobs report and further inflation readings as the key data points he is watching next.

However, Varadhan's oil call sits in tension with recent geopolitical escalation. The Strait of Hormuz, through which roughly a fifth of global oil consumption passes daily, remains a flashpoint: Iran's reported missile strike on a tanker in the US-backed southern corridor of Hormuz and the IRGC's declaration that the strait is a theatre of war rather than a shipping route challenge his assumption that a Hormuz deal is close. Iran has vowed to keep Hormuz shut until US demands are met.

If Goldman's base case holds and a deal eventually materializes, the resulting drop in energy prices would be disinflationary and supportive of Varadhan's call for the Fed to stay on hold rather than hike, feeding into his constructive view on front-end US yields and equities. But if the standoff hardens further, that entire chain reverses: energy prices would remain firmer for longer, inflation pressure would become more persistent, and the case for a Fed hold would become harder to sustain. For now, Varadhan's outlook reads as the more optimistic end of the Hormuz outcome spectrum rather than the base case implied by the latest tanker strike.