Goldman Sachs: The current market's biggest threat is the "Iran risk compounded by a rate storm". The stock market will continue to fluctuate even if it rises.

The Iran ceasefire agreement has reduced deep tail risks, leading to a widespread rebound in global risk assets. However, Goldman Sachs warns that this uptrend comes with a "consoling cost": the market underestimates the downside risks of a re-escalation of the Iran situation, and the pressure on bond yields from energy scarcity and economic resilience should not be underestimated either. According to reports from the Chase Wind Trading Desk, Goldman Sachs' global market outlook report released on May 15 states that since the Iran ceasefire, US stocks, emerging market stocks, high-yield and commodity currencies have all rebounded, with AI-related exposures reaching new highs in this cycle. AI-intensive markets such as South Korea and Nasdaq have also broken through pre-war highs. The driving force behind this rebound is the logic of "scarcity" - the shortage in chip memory and energy supply chains is leading capital to flow massively. Goldman Sachs strategists Dominic Wilson and Kamakshya Trivedi point out in the report that the implied pricing of US economic growth in the current market has risen to 2.5%, in line with the bank's growth forecast for 2027, and may even be overshooting. At the same time, the market's pricing of the tail risks in Iran is significantly low - the longer the closure of the Strait of Hormuz, the greater the re-pricing shock caused by energy scarcity; and the higher tolerance threshold after the rebound also means that once optimistic expectations suffer a greater impact, the repricing will be more severe. In the face of these risks, Goldman Sachs recommends pairing long positions in stocks with long positions in long-term S&P 500 volatility, with undervalued out-of-the-money put options on European stocks, credit, and currencies still offering the best risk-reward ratio in cross-asset comparison. With the ceasefire deadlock persisting and a comprehensive solution yet to be found, the theme of scarcity is expected to continue to dominate cross-asset price movements. Iran re-escalation: the most underestimated downside tail risk Goldman Sachs points out that risk assets are fully priced based on the assumption that deep tail risks can be avoided, but the probability of more unfavorable outcomes still exists and is underestimated by the market. The report warns that as the market's tolerance threshold for negative news increases, if the situation takes a more serious turn, the repricing will be more severe than expected. Goldman Sachs also highlights a circular dilemma: the market currently tends to ignore temporary disruptions, but it may actually require a new round of market panic to push all parties to reach an agreement and reopen oil flows. With no clear peace agreement and credible reopening of the Strait of Hormuz, the shortages in energy products will become more apparent over time, and the probability of the market facing this risk again will increase. In terms of hedging strategies, the bank believes that undervalued out-of-the-money put options on European stocks, credit, and currencies still offer the best risk-reward ratio in cross-asset comparison; long positions in oil also provide some protection, but face reverse risks if the crisis is fully resolved. Growth pricing has been overshooting, with limited room for policy easing Goldman Sachs' standard estimate for US growth pricing has reached 2.5%. The report points out that based on the change in the linkage between stocks and bonds, the market has "oversold" the short-term economic weakness, directly pointing to better growth prospects in 2027, and could be overshooting. The strength in technology and commodities may be exaggerating this indicator to a certain extent, but the overall signal is consistent with the market's forward-looking judgment. In terms of policy outlook, Goldman Sachs states that if the Iran issue is resolved, there is some room for policy easing in the coming months - the bank's interest rate forecast is generally more dovish than market pricing. However, with the US economy and labor market resilient beyond expectations, short-term inflation is expected to remain high, and without a significant improvement in oil and gas supply and an end to the conflict, the space for recent policy easing will be extremely limited. The combination of rising bond yields and stock markets has raised concerns about sustainability. Goldman Sachs believes that inflation pressure is likely to gradually diminish in the months following the peak in energy prices, and the market has already priced in rate hikes (including in the US), so the upward pressure on yields will eventually be contained. However, before that, the market may continue to worry about the juxtaposition of "more hawkish policy pricing and more subdued growth pricing" for the next few weeks. AI capital spending hits record highs, valuation risks rise The AI theme has returned with strong momentum, becoming the core focus of the current market. Goldman Sachs data shows that technology investment spending as a percentage of GDP has surpassed the historical peak of the late 1990s; during the first quarter financial reporting season, market expectations for the capital spending of super-scale cloud service providers by 2026 have been raised from $673 billion to $755 billion, and the expected spending for 2027 has jumped from $790 billion to $890 billion. The shortage in the semiconductor and memory sectors is particularly prominent, leading to significant upward revisions in the profit forecasts of benefiting companies. Unlike the late 1990s, current corporate profits as a percentage of GDP have also hit historical highs, indicating that macroeconomic imbalances have not yet appeared; concerns in the private credit sector have also eased, with Goldman Sachs believing that the likelihood of systemic risks being triggered is low. However, the report warns that the cumulative valuation premium of AI-related companies is continuously rising, leading to two potential fallacy risks in the market: the "aggregation fallacy", which assumes that the number of individual stock winners exceeds the overall economic capacity limit; and the "extrapolation fallacy", which assumes that profits supported by investment hype itself are sustainable. As long as profits and spending plans continue to exceed expectations, the AI sector still has upward momentum, but the market is accumulating valuation vacuum and will eventually face pressure to digest it. Hawkish rate repricing accelerates, narrowing the window for rate cuts in 2026 Goldman Sachs points out that at a time when most assets have been fully or even excessively repaired, the repricing of hawkish rates in the rate market remains unchanged. In the current situation where the Strait of Hormuz remains blocked, energy prices are high, growth remains resilient, and inflation data is starting to rise, there is a possibility of retesting or breaking through previous highs in the pricing of short-term interest rates. Compared to the dovish base forecasts at the beginning of the year, Goldman Sachs now expects the number of rate cuts in most developed and emerging markets globally to decrease, or even be completely canceled, as market pricing shifts further towards a hawkish direction. The bank believes that the threshold for a rate hike in the US remains very high, but persistent inflation pressure combined with no significant deterioration in the labor market is making the implementation of easing measures more difficult. Goldman Sachs states that the window for rate cuts in 2026 is rapidly closing. On the long end, the upward movement of term premiums in the UK and Japan has lifted terminal and long-term interest rates together. If the Iran situation is resolved and sequential inflation shocks subside rapidly, front-end interest rates are expected to experience some relief; but defense, energy security, fiscal spending, and continued private investment in AI infrastructure will constrain the downward space of long-term interest rates. Structural rise in stock volatility, insufficient market reaction at the index level One of Goldman Sachs' core judgments for 2026 was that long-term implied volatility for stocks would structurally rise. Since September last year, the long-term implied volatility of the S&P 500 index has shown a clear increase, but the average implied volatility of individual stocks as well as focused indices such as South Korea have experienced a greater and more sustained increase, leading to a clear differentiation from the performance at the broad index level. Goldman Sachs believes that this differentiation is partly due to the market's greater focus on the "allocative volatility" between winners and losers within the AI theme, rather than the "macro volatility" at the aggregate value level. This has led to historically low correlations between individual stocks, limiting the upward movement of the broad index volatility. This combination of high individual stock volatility and low correlation is somewhat similar to certain stages of the late 1990s, suggesting that in some shock scenarios, the increase in index volatility may be lower than expected. The bank maintains its recommendation to pair long positions in stocks with long positions in long-term S&P 500 volatility, continuously looking for opportunities to allocate capital when volatility is low in various asset classes to limit downside losses while maintaining exposure to further upside in the stock market. This article was originally published on "Wall Street See News", and GMTEight edited the Li Fu.