Strategists at Goldman Sachs suggest that investors should treat any pullbacks in the U.S. stock market as opportunities to buy, rather than signals of an impending bear market. A team led by Peter Oppenheimer stated in a report that despite "significant headwinds" for risk assets stemming from the Middle East conflict and concerns about the disruptive impact of artificial intelligence (AI), the resilience of economic fundamentals and strong earnings growth imply that the depth and duration of any downturn will likely be limited. Oppenheimer commented, "Given current valuation levels, we see an elevated risk of a market correction, but we expect this would present a buying opportunity, with a relatively low risk of a more prolonged and deeper bear market."
The S&P 500 is trading above its long-term average. Global equities experienced a turbulent start to the year. Initially, panic over AI's potential disruption to business models triggered sell-offs across multiple sectors, including software. Subsequently, the outbreak of war in the Middle East added further pressure. Nevertheless, Goldman Sachs strategists noted that, at the index level, markets had remained relatively stable until recently, though rapid rotation and heightened volatility among sectors and individual stocks have become defining features. They added that the dispersion of equity returns across regions and investment factors globally has led to above-average valuations, with all global sectors trading at expensive levels compared to their 20-year historical averages. Coupled with an exceptionally strong, U.S.-led bull market, this makes equities more vulnerable to potential shocks, such as threats posed by conflict involving Iran to oil and gas markets.
Oppenheimer pointed out, "The longer this uncertainty persists, or the more severe its impact on energy supplies, the higher the perceived risks to growth and inflation will become." However, he also added, "Most geopolitical shocks in recent years have not had a lasting impact on markets."
Despite volatility in U.S. stocks triggered by escalating Middle East tensions, Jonathan Krinsky, Chief Market Technician at BTIG, views this as an entry point for investors. Krinsky cited an old adage—"When missiles fly, time to buy." He wrote in a client note that "geopolitically-induced sharp volatility is typically not persistent," adding that the market's erratic movements "are more likely a tactical buying opportunity than a reason to sell at current levels." Morgan Stanley and Standard Chartered recently reaffirmed their bullish stances on U.S. equities. A team of Morgan Stanley equity strategists led by Mike Wilson wrote in a report that historical geopolitical risk events have not led to sustained market volatility, citing the average performance of the S&P 500 in the months following such events. Regarding the latest Iran conflict, the strategists noted that the primary bearish scenario would involve a sharp and sustained rise in oil prices, which could disrupt the business cycle they believe is strengthening. They stated, "Barring a historically significant surge in oil prices that is sustained, recent events are unlikely to change our bullish view on U.S. stocks over the next 6 to 12 months." This team had previously set a year-end 2026 target of 7800 for the S&P 500 in a January report, describing "multiple synergistic drivers" facilitating a rolling cycle recovery in the U.S. stock market. The bank characterized 2026 as a "broad-based equity bull market under a rolling recovery," advocating for a return of market risk appetite "from points to surfaces" and simultaneous cyclical upturns across multiple sectors, led by cyclical stocks in the second phase of the bull market.
Standard Chartered analysts also indicated that U.S. stocks can withstand the impact of escalating Middle East tensions, suggesting investors consider buying on dips of 5%-10%. Analyst Steve Brice stated that markets are digesting the unprecedented geopolitical shock from Middle East tensions relatively well, with the core investment rationale remaining to buy on significant pullbacks. While acknowledging increased uncertainty, Brice noted that equities could decline by 5% to 10%, which would present a buying opportunity. He emphasized that markets entered this period of anxiety against a backdrop of strong fundamentals, saying, "We are essentially in a 'Goldilocks' economic environment. Growth is remarkably robust, U.S. inflation is indeed declining, albeit slowly. We expect the Federal Reserve to cut rates, and corporate earnings remain solid." However, he cautioned that persistently high oil prices could gradually erode this favorable economic setting. Brice mentioned that investors are currently focused on assessing potential drawdowns under different scenarios: "I think this is what the market is trying to figure out—how much of a drawdown is possible in both base and tail-risk scenarios, and how to position investments accordingly." While closely monitoring developments, Brice maintains a pro-risk asset stance, describing the current environment as "likely a transient phase overall, though very different from anything we've experienced before." He also acknowledged the need to remain flexible and willing to adjust positions if the situation deteriorates further. The analyst highlighted a key difference in the current situation compared to past Middle East military interventions: "Past military actions in the region typically involved ground troops and could relatively quickly control the situation. This time is very different, with a significantly heightened risk of retaliatory actions in the region."
In contrast, Deutsche Bank issued a warning against employing a "buy-the-dip" strategy in response to the Middle East conflict, cautioning investors to be wary of catching a "falling knife." The bank believes the key question this week is whether oil and gas prices will surge to levels that hinder economic growth, thereby disrupting the recovery trade. Strategist Henry Allen wrote in a client note on Tuesday, "We have previously noted that geopolitical events typically do not cause sustained market reactions. The exception is when such events possess a macro channel to impact markets. The developments with Iran are a prime example of this." Following U.S. strikes on Iran last Saturday, crude oil prices surged. Concerns over future supply intensified after Iran threatened to block the Strait of Hormuz, a vital passage for 20% of global oil and liquefied natural gas shipments. However, Allen pointed out that WTI crude prices remain below their 2024 average, and the increase has not reached crisis levels seen during the outbreak of the Russia-Ukraine war or the two Gulf Wars. The strategist suggested that for a larger oil price spike to cause a drop of more than 15% in the S&P 500, at least one of three specific conditions would need to be met, none of which are currently present: a sustained oil price surge of 50% to 100% lasting several months; oil price increases pushing an already cooling economy into recession or severe slowdown; or central banks adopting hawkish policy responses to rising oil prices. He stated, "The key question in the coming days will be whether any of these conditions are triggered."
Comments