Goldman Sachs has identified a renewed flare-up of hostilities in the Middle East or an extended shutdown of the Strait of Hormuz as "the most obvious downside threat" to financial markets, warning that such an event would represent a materially deeper tail risk than markets currently price.
In a client note, analyst Dominic Wilson said the market response to the Iran ceasefire has been to sharply compress risk premia across asset classes. That compression has coincided with supply strains in commodities and disruptions across the AI supply chain, which together have channeled capital into equities tied to artificial intelligence and helped push valuation metrics to new cycle highs.
Wilson pointed to pronounced strength in AI-heavy indices, noting that regions and exchanges with concentrated AI exposure - including Korea, Taiwan and the Nasdaq - have climbed back to levels seen before the conflict. He described the post-recovery risk landscape this way in the note:
"After a sharp recovery, the distribution of risks is more balanced."
Despite that assessment of a more even distribution of risks, Goldman warned the market underestimates a deeper downside tail focused on a potential Iran re-escalation. The bank said that a gradual restart of energy flows would likely provide substantial relief across oil markets and rates markets that are currently priced quite hawkishly, and that such a restart could broaden positive price action across geographies and sectors.
On monetary policy, Goldman has revised its expectations for rate cutting and now anticipates fewer - or possibly no - reductions in policy rates from developed and emerging market central banks through 2026.
Turning to the AI investment theme, the firm noted that technology investment spending has now surpassed late-1990s peaks as a share of gross domestic product, a dynamic that elevates valuation risk. Goldman highlighted what it called "distributional" volatility within the AI theme - the divergence between winners and losers - as a central force keeping single-stock volatility high even as correlations among stocks fall to record lows. That combination, the bank said, has constrained broader index volatility despite pronounced moves at the individual security level.
Below are the core takeaways from Goldman Sachs' client note and the market dynamics it highlights.
- Risk premium compression: The Iran ceasefire has led to tighter risk premia across assets, helping fuel rallies in equities and emerging-market assets.
- Concentrated AI gains: Capital flows into AI-exposed equities have helped push certain indices - named by Goldman as Korea, Taiwan and the Nasdaq - to pre-war highs.
- Policy timeline shifted: Goldman now expects fewer or no rate cuts across developed and emerging market central banks through 2026.