Over the past two weeks, there has been a "historic reversal" in global markets. Goldman Sachs warns that the win rate for stocks remains low and cautions against overly optimistic expectations.

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After experiencing the largest oil supply shock in history triggered by the Middle East war, global financial markets have witnessed a historic, cross-asset, bi-directional reversal over the past few weeks—from panic selling to a broad rebound, with a speed that has caught the market's attention. In the face of this rare "return to original path" trend, Christian Mueller-Glissmann, Head of Asset Allocation Research at Goldman Sachs, and his team answer the key questions investors care about most.

Global stock indices have now surged, with U.S. tech stocks leading the rally and standing above pre-war levels. Brent crude oil and TTF natural gas have dropped sharply following news of the reopening of the Strait of Hormuz, but remain above levels seen before the conflict. Bond market repair has lagged, especially in Europe, reflecting concerns about the persistence of interest rate shocks that have yet to fully dissipate.

Despite the swift rebound, Goldman Sachs' cross-asset framework issues a clear warning: After this round of stock market recovery, risk-reward remains skewed. The probability of the S&P 500 experiencing a drawdown of more than 20% in the next 12 months is still high, while the chance of a gain beyond 35% is quite low. Meanwhile, market pricing of growth prospects is clearly ahead of actual macro data, raising concerns about excessive optimism.

With volatility having significantly retreated from its peak, Goldman Sachs believes the cost-effectiveness of tail hedging tools has now improved, and provides targeted cross-asset hedge portfolio recommendations for both the soft stagflation scenario and the war de-escalation scenario.

Rebound Recovers Most Lost Ground, Tech Stocks Lead U.S. Market to New Highs

Since April, most major global assets have reversed course. According to Goldman Sachs, since the peak in "risk aversion" sentiment sparked by the Middle East war, the vast majority of losses have been recouped.

U.S. stocks, led by the technology sector, have performed strongest, with gains now surpassing pre-war levels. This partly reflects robust earnings so far this year, and also results from AI-related disruptions and the high-rate environment already pressuring U.S. equities before the conflict, making subsequent rebound potential larger. Russell 2000 smallcaps have also rebounded sharply, with Asia and emerging markets still dominating globally based on cumulative performance year-to-date. European and U.S. bank stocks have seen notable recovery as well.

By contrast, Japanese government bonds, gold, and silver have performed worst during this round of two-way volatility; low-volatility and value stocks have also lagged, due to their limited tech sector exposure. The bond market has generally lagged behind equities in the pace of recovery, with the European market catching up somewhat after the Strait of Hormuz reopening news, but its overall trajectory remains highly linked to energy prices.

Sentiment and Positioning Warm Up, Internal Divergence Remains

Goldman's composite positioning and sentiment indicators show that the recent warming has been mainly driven by risk appetite indicators (RAI), systematic investors, options positions, and sentiment surveys. Notably, during the entire Middle East conflict, fund flows, futures positioning, and inflows into safe asset bonds remained steady, with no large-scale withdrawals. This partly explains why overall sentiment did not hit extreme pessimism.

The biggest position reversal occurred in the options market—in which investors dramatically increased put/call ratios to hedge geopolitical risks, but recently have shifted to upward hedging. Rebalancing activity from risk parity and CTA strategies, and concentrated short covering by macro traders, can explain much of the speed and magnitude of this rebound.

For hedge funds, consensus positions in short-end rates, the dollar, and carry trades came under pressure, combined with substantial rotation within equity styles and sectors, causing net leverage to drop sharply. While net leverage has now rebounded from lows, it still trails the overall market recovery, implying further room for rebalancing ahead. However, Goldman’s RAI has rapidly bounced back into positive territory. RAI over 1 is usually a momentum signal, not a contrarian indicator, and does not constitute sufficient grounds for sustained expansion in risk appetite.

Stock Market Win Probability Remains Low; Valuation and Positioning Reset Not Sufficient

Goldman's equity asymmetry framework shows that none of the three necessary conditions for "better win probability" after this drop have been fully met.

First, valuation and positioning reset has been only moderate. RAI never turned deeply negative, the degree of downside in this round was shallow, and resilient earnings growth prevented much compression in valuations. As the rebound progressed, valuations have rebounded further.

Second, the second derivative of macro momentum shows no signs of improvement. Goldman Sachs economists have downgraded global GDP growth forecasts, raised inflation forecasts, and expect major central banks to have less room for policy easing. Relevant data shifts may become evident in the coming weeks.

Third, while the tail risk of the Middle East conflict has eased, uncertainty remains. From the oil options market’s perspective, extreme tail risk of surging oil prices has normalized, but Goldman stresses that whether this de-escalation will continue to support risk assets depends on whether the war truly comes to an end.

Growth Pricing Ahead of Realities; Q1 Reporting Season is Key Test

Markets are starting to "look ahead," treating the recent growth shock from the Middle East war as a temporary disturbance, but the degree of this optimistic pricing is cause for caution for Goldman Sachs. Goldman’s global growth factor versus the global macro surprise index shows that during this rebound, asset prices have recovered ahead of actual macro improvements.

Currently, macro surprise indices outside Europe remain positive, but are expected to start weakening. The upcoming Q1 reporting season will be the key verification window. Goldman’s U.S. equity strategy team notes that S&P 500 earnings growth remains largely supported by the tech sector and AI capital spending, but the main issue outside technology is this: elevated energy prices and supply chain disruptions may erode profits—especially profit margins—to varying degrees. The European strategy team focuses on similar supply chain disruptions, and the high sales exposure of European companies to Asia and emerging markets, especially the concrete negative impact during the Strait of Hormuz blockade period.

More divergent growth data may intensify sector-level differentiation, but may not trigger broad "risk-off"—unless the U.S. faces recession risks. Currently, the relatively flat yield curve hints at rising recession risk induced by rate shocks, but this is not yet the mainstream expectation.

After Volatility Resets, Goldman Sachs Offers Two-Way Tail Hedging Strategies

With market expectations of a prolonged de-escalation in the Middle East conflict rising, overall volatility has compressed materially, and tail hedge tools have become more cost effective.

Under a soft stagflation scenario (global growth pricing factor falls near zero, with no meaningful easing in rates), Goldman recommends credit market hedges, is bullish on European stock put options, and notes that U.S. and Chinese equities may be sustained by tech sector tailwinds; it also recommends AUD/JPY and NZD/JPY cyclical currency put options.

In the war de-escalation upside scenario (the "reverse gold combo"), Goldman is bullish on carry trades and rates receiver strategies, prefers allocating to S&P 500 call options and European rates receiver positions, and advises against credit upside trades, since credit spreads did not widen significantly in this round of turmoil, and equities have greater upside elasticity.

Risk Warning and DisclaimerThe market carries risks, and investments should be made cautiously. This article does not constitute personal investment advice, nor does it consider any individual user's particular investment objectives, financial situation, or needs. Users should evaluate whether any opinion, viewpoint, or conclusion in this article suits their own circumstances. If you invest based on this, you do so at your own risk. ```