Goldman Sachs: The biggest threat to the current market is the "Iran risk combined with the interest rate storm"; even if the stock market rises further, volatility will increase.
The Iran ceasefire agreement has compressed deep tail risks, ushering in a broad rebound in global risk assets. But Goldman Sachs warns that this rally contains a hidden "cost of comfort": the market is significantly underpricing the downside risk of renewed escalation in Iran, and the upward pressure on bond yields from energy scarcity and economic resilience should not be underestimated.
According to Feng Trading Desk, citing Goldman Sachs’ Global Market Outlook report released May 15, since the Iran ceasefire, U.S. equities, emerging market stocks, high-yield and commodity currencies have all rebounded—AI-related exposures have hit new cycle highs, and AI-intensive markets like Korea and Nasdaq were first to surpass pre-war peaks. The common driver behind this rebound is "scarcity"—shortages in chip memory and energy supply chains are directing capital flow on a large scale.
Goldman strategists Dominic Wilson and Kamakshya Trivedi point out in the report that the implied pricing for U.S. economic growth has now risen to 2.5%, matching the bank’s 2027 forecast, and may even have overshot. At the same time, the market’s pricing of Iran tail risk is notably low—the longer the Strait of Hormuz remains closed, the greater the repricing shock triggered by energy shortages; and higher market tolerance after the rebound means that if optimistic expectations suffer a bigger blow, the repricing will be more intense.
Faced with such risks, Goldman suggests pairing equity longs with S&P 500 long volatility positions, noting that out-of-the-money put options for European equities, credit, and FX still have the best risk/reward ratio across asset classes. With the ceasefire stalemate ongoing and no comprehensive solution yet landed, the scarcity theme is likely to continue dominating cross-asset prices.
Iran Escalation Again: Market's Most Underestimated Downside Tail Risk
Goldman points out that risk assets are fully priced based on the assumption that "deep tail risks have been avoided," but the probability of a worse outcome remains real and underestimated by markets. The report warns that due to the market’s increased tolerance for negative news, any severe reversal in the situation could trigger more intense repricing than expected.
Goldman also highlights a cyclical dilemma: the market currently tends to ignore temporary disruptions, but it may actually need another round of market panic to drive all parties to reach an agreement and reopen oil flows. Without a clear peace deal and credible reopening of the Strait of Hormuz, energy shortages will become more apparent over time, raising the probability that markets will have to face this risk again.
In terms of hedging strategies, the bank believes European equities, credit, and FX out-of-the-money put options perform best across asset classes; oil longs offer some protection, but also face reversal risk if the crisis is fully resolved.
Growth Pricing Overdone; Limited Scope for Policy Easing
Goldman's standard estimate for U.S. growth pricing now stands at 2.5%. The report notes that the linkage between stocks and bonds shows the market has "overdrawn" short-term economic weakness, directly priced in the more positive 2027 growth outlook, which may even have overshot. Strong tech and commodity performance may exaggerate this indicator, but overall signals are consistent with the market’s forward-looking judgment.
On the policy outlook, Goldman says if the Iran issue is resolved, there is some room for policy easing in coming months—the bank's interest rate prediction is generally more dovish than market pricing. However, with the U.S. economy and labor market proving more resilient than expected and inflation set to remain high in the short term, unless oil and gas supply improves notably and hostilities end, the scope for near-term policy easing will be extremely limited.
Bond yields rising in tandem with equities is causing the market to question sustainability. Goldman believes inflation pressures should gradually dissipate within months after energy prices peak, and markets have already priced in rate hikes (including in the U.S.), so upward yield pressure will ultimately be checked. But until then, the coming weeks could see persistent worries about "more hawkish policy pricing amid weaker growth pricing" overlapping.
AI Capex Hits Record, Valuation Bubble Risk Rises
The AI theme is making a strong comeback, becoming the core focus of the current market. Goldman’s data shows tech investment spending as a share of GDP has surpassed the historic peak in the late 1990s; during the Q1 earnings season, consensus market estimates for hyperscale cloud providers’ capex in 2026 rose from $673 billion to $755 billion, and expectations for 2027 jumped from $790 billion to $890 billion. Shortages in semiconductors and memory are particularly acute, with beneficiary companies’ profit forecasts heavily revised upwards.
Unlike the late 1990s, current corporate profits as a share of GDP also hit a historic high, and the macro imbalance indicators from then have not appeared. Concerns in the private credit sector have also eased, with Goldman seeing a low likelihood of systemic risk arising from this.
Nevertheless, the report warns that aggregate valuation premiums for AI-related companies continue to rise, and there are two potential mispricing risks: first, the "aggregation fallacy"—assuming the number of stock winners exceeds what the economy can actually support; second, the "extrapolation fallacy"—assuming that profits driven by the investment boom are sustainable. As long as profit and spending plans keep exceeding expectations, the AI sector retains upside momentum, but the market is accumulating an air gap in valuations that will inevitably face digestion pressures.
Hawkish Rate Repricing: 2026 Rate-Cut Window Rapidly Shrinking
Goldman points out that, with most assets fully or even excessively recovered, hawkish repricing in rates markets continues. Amid ongoing closure of the Strait of Hormuz, high energy prices, resilient growth, and rising inflation data, there is the potential for front-end rate pricing to retest or break previous highs.
Relative to the dovish forecasts at the start of the year, Goldman now expects the number of rate cuts in most developed and emerging markets to decrease—or even be cancelled entirely—with market pricing moving further in a hawkish direction. The bank sees the threshold for U.S. rate hikes as still extremely high, but persistent inflation pressure combined with no clear weakening in the labor market also makes easing harder to execute. Goldman says the 2026 window for rate cuts is rapidly narrowing.
On the long end, term premium rises in the UK and Japan have dragged up both terminal and long-term rates. If the Iran situation is resolved and inflation shocks fade quickly, front-end rates may ease somewhat, but ongoing fiscal spending on defense, energy security, and AI infrastructure will cap downward movement in long-term rates.
Structural Lift in Equity Volatility, Index Response Still Inadequate
One of Goldman’s core 2026 judgments is that long-dated implied equity volatility will rise structurally. Since September last year, implied long-dated volatility on the S&P 500 has trended up, but average single-stock implied volatility—and vol rises in concentrated indexes like Korea—have been even larger and longer-lasting, resulting in marked divergence from broad-based index vol performance.
Goldman believes part of this divergence stems from the market’s focus on "allocation volatility" among AI theme winners and losers, not "macro volatility" of total value. Correlations between stocks have dropped to historic lows, limiting broad index volatility from moving higher. This high single-stock vol plus low correlation combo resembles certain periods in the late 1990s, suggesting that in some shock scenarios, index vol rising may fall short of expectations.
The bank maintains its recommendation: pair equity longs with S&P 500 long volatility positions, stay alert for allocation opportunities when volatility cheapens across assets, and retain equity upside exposure while limiting downside losses.
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