The market has not ignored the war; it has simply decided not to bet on the worst-case scenario.
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Goldman Sachs researcher Dominic Wilson believes that the recent resilience of U.S. stocks does not mean the market is ignoring risks—instead, the market is starting to bet on easing conflict. However, with the situation in Iran still volatile and tail risks persisting, investors must remain vigilant.
On April 14, Dominic Wilson discussed the Iran conflict with host Allison Nathan on Goldman Sachs’ “Exchanges” podcast, including the global market impact of a U.S.-led blockade of the Strait of Hormuz.
(Left: Dominic Wilson, Right: Allison Nathan)
Last week, news of an Iran ceasefire agreement triggered a sharp rebound in markets, only to be dampened by the U.S. announcement of a blockade of the Strait of Hormuz. Nevertheless, the S&P 500 has reclaimed all pre-conflict losses, while oil prices remain elevated.
Wilson stated that the market's reaction is not surprising. In previous crises, markets often began to recover before on-the-ground conditions improved—just as was observed during the COVID-19 pandemic and the tariff shocks.
Wilson notes the market has made its own judgment, believing that the ongoing negotiations allow people not to excessively worry about extreme negative military outcomes. However, he thinks that while investors are reestablishing core long positions, they must also actively build hedges.
Specifically, he suggests areas to watch include AI-related assets, cyclical and commodity-linked emerging market assets, as well as markets like Japan and South Korea that were strong even before the conflict. But he particularly stresses:
You must always be aware of risk scenarios and have a clear understanding of how your positions would perform in a worst-case scenario.
Meanwhile, there is a notable divergence between rates markets and equities, with the former pricing in a more hawkish outlook. Wilson points out that markets fear inflation pressures will prompt central banks to stand pat or even tighten policy, and that rates markets may have over-priced hawkish expectations.
Stocks’ rebound logic has priced in extreme risk scenarios
Wilson explains that the stock market's recovery is due to markets re-pricing the likelihood of extreme negative scenarios.
In the initial weeks of the conflict, markets feared a prolonged deterioration with more aggressive military solutions. As talks began, the market judged that the probability of those “worst-case scenarios” had dropped significantly, shifting more weight to the path toward eventual reconciliation.
He cites the COVID-19 pandemic as an example, noting how the market bottomed before infection and death rates peaked. He says:
For an asset with a very long discount horizon, short-term economic damage is tolerable—what truly scares the market is uncertainty about the future.
As long as the market believes the current tensions will be resolved within weeks, the difference between a two-week and an eight-week resolution is not that significant for long-dated asset valuations.
However, Wilson emphasizes this judgment does not mean that downside risks have been eliminated:
Extreme risks still exist. We cannot confidently say that those previously feared scenarios won’t resurface. As markets become less vigilant, tail risks may begin to look underpriced.
Rates markets may have over-priced hawkish expectations for central banks
The movement of rates markets contrasts sharply with equities.
Wilson notes that since the start of the conflict, rates markets have remained much more concerned about hawkish central bank responses. According to Goldman Sachs’ measures, the market has largely priced in expectations for medium-term growth damage, but concerns about sustained central bank caution remain persistent.
He believes this is partly due to inflation “scar tissue.” The traumatic experience of past high inflation leaves markets more alert to central bank reactions.
Also, prior to the conflict, the market had priced in two and a half Fed rate cuts this year, which was already excessively dovish—so the current correction is rational.
But across Goldman’s range of forecast scenarios, Wilson believes:
There are more scenarios where rates end up lower than market pricing than ones where they end up higher. On the whole, markets remain priced for hawkishness.
He adds that Europe is more likely to hike than the U.S., but even then, most central banks are more likely to stay put than actively tighten.
Short-term USD support rises, but medium-term weakening logic unchanged
Wilson says that oil shocks’ support for the dollar fits historical patterns.
The dollar is benefiting from safe-haven flows and improved U.S. terms of trade as an oil exporter. The trade-weighted dollar index is now only slightly below where it started the year, having largely recouped its losses.
This round of conflict, he believes, is a reminder to markets:
In the face of certain shocks, holding dollars is an effective hedge—not reducing dollar holdings to avoid risk.
This has made some investors more cautious about betting on dollar weakness. However, Wilson emphasizes that the medium-term structural case for dollar weakness is unchanged.
The dollar remains overvalued; the Fed is still more likely to cut rates than other major central banks; and the geopolitical/institutional shifts that have been pushing capital out of the U.S. remain intact. He says:
In the short term, this event has provided more support for the dollar than expected. But in the medium term, the dollar weakening story still stands.
AI theme strongly returns; strategy must balance ‘offense and defense’
Although geopolitical conflict remains investors’ top concern, previous dominant trends haven’t disappeared, and funds are rapidly flowing back. Wilson notes:
The AI theme has quickly returned, not just in discussion but also in actual market action.
Wilson has observed that semiconductor stocks have not only regained ground lost during the conflict, but some have made new highs, while software stocks remain under pressure.
Wilson emphasizes that institutional investors are very reluctant to give up their core positions. Once the market stabilizes, funds quickly return to the AI areas they believe have value.
Given ongoing uncertainty, Wilson advises a "selective long plus active hedging" dual-track strategy.
He believes that when markets move higher due to negotiation progress and sentiment relaxation, that is the right time to add to tail risk hedges; when new negative news sends markets lower, it is an opportunity to add core risk exposures at discounted valuations.
Specifically, when markets fall and hedges work, investors can add to favored assets like tech stocks, cyclical commodities, and emerging markets (such as Japan and South Korea) at lower prices. When the market rebounds and relaxes, investors should immediately increase protection against downside risks.
Wilson says:
Don’t leave yourself totally unprotected against severe tail risks. If you’re not simultaneously increasing protection, I wouldn’t advise increasing risk exposure.
The full interview follows (AI-assisted translation):
Allison Nathan: Last week, news of an Iranian ceasefire triggered a strong market reaction, but this week the U.S. announced a blockade of the vital Strait of Hormuz for global energy flows.
How are markets seeking direction amid this uncertainty? How should investors respond? I'm Allison Nathan. Welcome to Goldman Sachs Exchanges podcast. Today's guest is Dominic Wilson, Senior Markets Advisor in Goldman Sachs Research. Dom, welcome back.
Dominic Wilson: Thank you, happy to be here again.
Allison Nathan: Dom, developments around Iran's conflict have been dramatic. Frankly, the blockade you mentioned is the latest twist, and it doesn’t make me optimistic about a quick resolution. But looking at markets—especially the S&P 500—prices are back near pre-conflict levels. Were you surprised? Are markets underestimating downside risks?
Dominic Wilson: There are two levels to this question, which I think need to be separated.
First, “Am I surprised?” We keep reminding ourselves: every time we go through a crisis or these kinds of events, markets usually experience a lot of worry, and the first phase of relief often mainly comes as people begin to reduce their weighting of extremely negative scenarios. So a rebound before all issues are solved is not unusual. Think back to COVID or the tariff shocks—markets often began to recover before things looked better on the ground.
I think the current state of the market is essentially the same—you can see oil prices remain high, oil flows haven’t returned to normal, but markets have made a judgment: a few weeks ago, the probability distribution was extremely broad, including lengthy deterioration and severe military scenarios. Now, rightly or wrongly, as talks are ongoing (albeit far from finished), the market has cut the weight on those extreme negative scenarios. Even if the medium-term outlook isn’t optimistic, even if short-term activity is weak, stocks—thanks to their long discount horizon—can digest short-term weakness.
But is the market's judgment correct? In terms of direction, I think it’s right—compared with a few weeks ago, when even the start of talks was uncertain and floated military options were much more severe than those we've actually seen since, we’re in a better spot now. So, the reduction in pricing for tail risks is justified.
Personally, I’m not too surprised by the market rebound. As for whether tail risks are underestimated: I think the risk has receded and the bar for shaking confidence is higher, but real risks remain. Can we say for sure that those extreme scenarios won’t return? The answer is no; we’re just more confident than before. So that deep tail risk remains what I worry about—and as sentiment relaxes, it’s looking underpriced.
Allison Nathan: I agree, but I want to clarify—right now the entire strait is supposedly blockaded. Previously, there was at least a trickle of oil; now, supposedly, nothing.
Dominic Wilson: Yes. My experience of this crisis—and I think many others' too—began with commodity experts being extremely bearish while markets were quite calm. Commodity experts were basically saying, “You have no idea how serious a blockade is.” They were right. So, in the first few weeks, markets fell as they realized there were real downside risks, that this was no joke and couldn't easily be solved.
But now we’ve reached a marginally different place. If you tell people today that the strait will be closed for several more months, oil will keep rising, and the economy will suffer—most people already know that. And as long as people believe the problem will eventually be solved, for a stock with a multi-year horizon, short-term losses are tolerable. What really hurts the stock market is lack of confidence about what things look like after the problem is solved.
So, there’s tension between spot markets and forward-looking markets—it doesn’t mean equities are correct, but if markets think this is just a negotiating episode—albeit tense, with threats and potential new conflicts—but will ultimately be settled in a few weeks, then for multi-year assets, the difference between two weeks and six or eight weeks’ resolution is not huge.
Of course, there are assumptions here that can be questioned. But I want to say this logic, while it looks odd, is part of the forward-looking nature of equities. During the COVID pandemic, before the surge in infections and deaths, the market had already moved past the worst-case scenario. The tension between spot reality and future expectations makes such issues especially tough to grasp.
Allison Nathan: Very true. What I find interesting is that, while the S&P 500 and equities show strength, rates markets are priced quite differently. What’s your take?
Dominic Wilson: That’s striking. From the start of this crisis and continuing now—we’ve seen from rates markets much more concern that central banks will turn hawkish in response to inflation, far more than concern about lower growth.
There is some concern about growth, but our indicators show the vast majority of medium-term growth fears have been repaired with this easing. What has not eased is the belief that central banks will be significantly more hawkish than pre-crisis.
Part of this is that everyone expects an inflation spike, prompting central bank caution—even though, on a medium-term path, it shouldn’t matter much. I think the history of high inflation has left markets much more sensitive to “central banks being cautious.” Also, prior rates pricing was not too reasonable—back then we were expecting sustained cuts; in hindsight it looks almost funny: in February, people worried about AI causing unemployment, and markets with great confidence were pricing two and a half Fed cuts this year. That pricing already looked dovish. Now it’s being corrected, and in this environment, it’s easier for the market to accept that central banks are likely to be cautious.
But there’s a strange tension: markets think this shock is severe enough for central banks to worry about inflation, but not so severe that economic damage overwhelms inflation concerns. That’s what surprises me a bit—markets have moved far, and stayed there, in this direction.
Allison Nathan: So you think markets have swung too far, and rate hike expectations shouldn’t be this strong?
Dominic Wilson: I think so. There's variation among countries—Europe more likely to hike than the U.S. But overall, with our forecasts and Yarn's team's scenario analysis, the path for rates to go lower is more likely than higher. Our scenario distribution is overall more dovish than the market’s pricing.
But, things are better than two weeks ago. Two weeks back, short end rates markets were under huge pressure—Europe priced for sustained hikes, and real U.S. hiking odds were there—clearly overstretched.
Now, there’s more debate—I think many central banks will see that staying put is the easiest choice—not hiking or cutting. This “do nothing” path may be where we end up, and that is more hawkish than pre-crisis. Overall though, I still see markets as, on average, priced hawkishly.
Allison Nathan: And where does that leave the dollar? For listeners: going into the year, we were modestly bearish the dollar; with the conflict, the dollar found support; now it looks weaker again. What's your view?
Dominic Wilson: It’s a more complex picture. At the start of the year, we were indeed dollar-bearish but modestly so. Compared to last year, this year we’ve emphasized that there are major drivers besides the dollar in FX markets—like some cyclical and carry currencies performing well. Along that axis, those trades have dominated. Then in January and February we saw the dollar weaken, even more than we had forecast. Now, that move is almost fully reversed.
The big logic is, oil price shocks support the dollar as expected—the U.S. benefits in two ways: safe haven inflows and its oil exporter status. The trade-weighted dollar is now only slightly weaker than it was at the year’s start—it’s given back the year’s move.
As for what’s next, it’s gotten more complicated. In both directions: as oil risk is digested—oil likely higher for longer than previously assumed—that supports the dollar. This episode also reminds investors the dollar can be a hedge against some shocks—a lesson we already knew, but it's reinforced now. So, I expect less willingness to bet on dollar weakness; investors more cautious—that won’t surprise me.
On the other hand, from a longer-term, strategic view, the dollar is still overvalued, and now even more so after the rebound; even with relatively strong U.S. growth, the Fed is still more likely to cut than other major central banks. The drag from structural, geopolitical, and institutional changes—plus AI concentration risk—remains.
Thus, the case for medium-term dollar weakness still stands; it’s just that, in the short term, this episode gives the dollar more support than it otherwise would have had.
Allison Nathan: Let me broaden out. At the start of the year, the narrative was capital leaving the U.S. for the rest of the world and other assets. Amid the huge swings around the conflict, where does that trend stand now?
Dominic Wilson: Frankly, I think it’s complicated. I don’t think the trend reversed, nor am I sure it’s over. But this event has reminded investors that shocks like this are tougher—and more damaging—for key non-U.S. markets (especially Europe and North Asia), where fundamentals are shakier and positioning heavier. We had begun to see reallocation, but this shock directly contradicted the dominant trend, causing clear pain.
And these risks are unlikely to fully disappear—they’ll linger over the market for some time—unless oil market supply shortages are resolved exceptionally quickly and thoroughly, this cloud will persist. So, I expect more picky, more hesitant investing outside the U.S.
Allison Nathan: As we discussed, the main theme at the start of the year was AI, along with the labor market and other prominent topics. Amid all the volatility over Iran, do any other themes battle for market attention? What are investors telling you they’re watching?
Dominic Wilson: No doubt, Iran remains the top concern. The easing in equities is somewhat reassuring, but it’s not like people are saying “that’s over, move on”—they’re thinking about what to do next, but the focus is still on the path and reality of a solution.
However, those other themes you raised really have returned. Had you asked me two or three weeks ago, during peak turmoil, I’d have said they’d almost completely vanished from discussion. But as the market warms, they have quite quickly re-entered investors’ focus.
There’s some sequence to these. The private credit debate never fully disappeared, just went on the back burner; I’m not sure we’re seeing much genuinely new here—the worries persist, debate continues, we’re overall constructive, but the arguments rage on.
But more notably, the AI theme—both discussion and in actual market moves—has come roaring back. Semiconductor stocks are strong again: within AI and tech, we see a clear divergence revived—hardware like memory chips shine, while software is pressured by worries about new-generation AI competition. Now, this division resurfaces—software stocks again underperforming in this rebound, while semis have hit new highs—among the few sectors to break their pre-conflict highs in this turmoil. The AI theme is back with force.
What we keep hearing is this: investors strongly believe in their core equity themes; what they’re doing is protecting index and broad risk, but they’re extremely reluctant to abandon core positions. Remarkably, people return to their convictions quickly. That’s impressive.
Allison Nathan: Looking ahead to the next few weeks or months, how should investors position while uncertainty persists? Negotiations may have started, but the situation remains opaque. Do you expect more of the same?
Dominic Wilson: These events are inherently complex. We’ve broadened the range of outcomes—maybe narrowed from peak panic but still much wider than normal. All possibilities remain.
In many ways, it’s a continuation and variation on our early-year U.S. view: for assets you believe in, selectively hold long risk, while actively hedging, because downside risk remains and could easily strike again.
In practice—easier said than done—our strategy is to look for opportunities in both directions as markets swing. When you have good hedges and the market falls and those hedges work, consider adding to favored assets at the lows; when the market rebounds and sentiment relaxes, think about ramping up hedges.
Right now, as markets ease, back to your question—I think downside risk is underpriced. The right response is to add deeper downside hedges in equity and credit. Investors shouldn’t leave themselves exposed to extreme tail risks. Truly bad outcomes can be protected against.
Sure, the market could just bounce around as negotiations drag out, but real tail risks do exist; the market has relaxed its focus on those risks, and exactly at such times it’s right to increase hedges and ensure good protection.
Meanwhile, you must consider what happens if we actually do get a solution. I don’t think abandoning all positive risk is right. When markets correct, selectively add long positions to structural favorites—some tech names, cyclicals, commodity-linked EMs, Japan, Korea. Use such chances to build positions, but only if you’re also increasing protections. Always be aware of tail risks, and understand how your portfolio would fare if those occur.
Allison Nathan: Dom, thanks for this substantive insight during such a fast-evolving situation.
Dominic Wilson: Thanks for having me. I’m sure things will be quite different in another week or two.
Allison Nathan: I think so too. We’ll have you back then. Thank you, and thanks to everyone for listening to this episode of Goldman Sachs Exchanges. This was recorded April 13, 2026. I'm Allison Nathan. If you like this show, please follow us on Apple Podcasts, Spotify, YouTube, or your favorite podcast platform, and leave a rating or review.
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