Market pricing is shifting from "a quick end to the war" to "spreading uncertainty."

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Geopolitical conflicts continue to ferment, and Wall Street’s optimistic expectations for a "quick resolution" are unraveling.

On Friday, Goldman Sachs top trader Shawn Tuteja noted in his latest client report that the market narrative is undergoing a key shift—from believing the conflict would be quickly resolved, to pricing in "uncertainty lasting indefinitely."

Tuteja said that over the past few weeks, the mainstream narrative among Goldman clients has consistently been that the geopolitical conflict will be "resolved," but as the situation drags on, this confidence is wavering. Last weekend, market sentiment sharply turned, clients began to short low-quality stock baskets and European assets aggressively, while betting oil prices would continue to rise. Meanwhile, the Fed’s hawkish stance on Wednesday further suppressed risk appetite—clients generally felt the Fed missed an opportunity to calm markets and instead highlighted economic strength, exacerbating bearish sentiment.

The S&P 500 is currently down about 5% from its historical high and almost flat compared to six months ago. Tuteja believes current risk-reward has become more symmetric than before, but warns that if the AI sector or momentum longs turn downward, the market faces tail risks that clients have not fully hedged.

Narrative Shift: From "Quick Resolution" to "Unsolvable"

Tuteja pointed out that in recent client conversations, the view that "the conflict will be resolved" was almost universally accepted, though clients often lacked clarity on the path to resolution. However, as the situation drags on, the credibility of this narrative is being eroded.

Last weekend, market sentiment took a clear turn. Clients began worrying that oil supply could be critical in weeks, while solutions may not arrive in time. This drove massive shorting of low-quality stock baskets (including Russell 2000 index RTY and Goldman Sachs low quality basket GSXULOWQ), and added new European short positions.

This week, however, market moves have made bears uncomfortable as well—the stock market rebounded without clear signs of resolution, catching fast-money clients with newly adjusted positions on both sides. Tuteja described the first four trading days this week as showing two-way flows and sharply divided sentiment.

Currently, clients have formed two distinctly different views on the outlook: first, that the conflict will be resolved in one to two weeks; second, that the situation will become deadlocked, and the market will digest it in two ways—a sharp drop triggered by quick de-leveraging or a prolonged slow decline similar to 2022. These pessimistic scenarios are expressed through VIX call options, S&P 500 tail puts, and derivatives tools like VKO.

Facing uncertainty, funds are seeking a safety cushion. Goldman’s client communications show investors’ median "blind buy" consensus level for the S&P 500 is between 6100 and 6200, which implies there is still 6%–7% downside from current levels.

Fed Hawkish Statement Increases Market Fragility

The Fed’s statement on Wednesday became an additional negative factor this week. Tuteja noted that clients generally believed the Fed had an opportunity to send a calming signal amid current turmoil, but instead focused on economic strength, interpreted by the market as a hawkish stance and further dampening risk appetite.

Against this backdrop, the movement in the rates market is particularly noteworthy. Earlier in the year, yields rose alongside cyclical stocks outperforming defensive stocks, reflecting expectations for economic re-acceleration. But recently, this correlation has broken—the market is pricing in higher terminal rates and reduced rate cut expectations even as cyclical stocks significantly underperform defensive stocks.

Tuteja views this “violent volatility in the bond market,” occurring amid weak nonfarm payrolls and questioning of the AI narrative, as a concentrated manifestation of cross-asset fragility. He points out that the rapid shifts in the rates market are likely position-driven, rather than rooted in fundamentals.

AI Narrative Still Supports Market, But Is a Potential Tail Risk

Despite market turbulence, the AI narrative remains intact for now. Goldman’s proprietary book shows AI-related positions are at historic highs, and Mag7 holdings are also near record levels—as doubts about growth prospects arise, funds have reconcentrated on these names.

Relatively, Goldman’s AI long basket GSTMTAIP ratio to non-AI S&P 500 index SPXXAI is near historic highs, with each pullback getting shallower.

However, Tuteja also sees this highly concentrated AI position as a potential risk point. He notes that if looking for signs of market capitulation, focus should be on the AI sector—it’s clearly not there yet, but this means clients are inadequately prepared for downside in AI and momentum longs.

Goldman’s proprietary book also shows clients’ overall exposure to momentum factors is at a five-year high. Tuteja suggests that the optimal hedging tools for tail risks are put spreads on GSTMTAIP and Goldman’s mid-term momentum factor basket GSX1BFML—the former’s 2-month 80/95% put spread costs about 2.62%, and the latter’s 75/90% put spread costs about 2.67% for the same term.

Valuation Compression Underway; Risk-Reward Becomes More Symmetrical

From a macro perspective, the S&P 500 index has been basically flat since mid-September last year, with zero gains over six months. Goldman’s research department maintains its EPS forecasts for 2026 at $309 and 2027 at $342, believing the impact of GDP slowdown will be offset by increased AI investment spending.

Tuteja points out that with rising earnings expectations, the index’s stagnation over six months essentially means valuation multiples are compressing. While US equity valuations at the start of the year were still rich by historical standards, the compression of NTM P/E ratio over the past six months is significant in the context of the past 45 years.

Against this backdrop, Tuteja believes the current risk-reward is more symmetric than before. He says when the index was at higher levels, the hot topic was "how much upside can a ceasefire bring"; but at the current level, the upside space is now much more substantial.

He concludes that at the net-position layer, clients have some hedges for mild equity downside, so are not overly bearish at current levels. But he stresses clients are clearly unprepared for declines driven by AI or momentum longs, which is the market’s most notable tail risk right now.

Risk Warning and DisclaimerThe market carries risks, and investments should be made cautiously. This article does not constitute personal investment advice and has not taken into account individual users’ specific investment goals, financial status, or needs. Users should assess whether any opinions, views, or conclusions in this article fit their particular circumstances. Invest at your own risk. ```