"The worst moments are over?" Goldman Sachs trader: The market has entered a new phase, and tail risks are disappearing.

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Although the US-Iran negotiations failed to reach an agreement and Trump's announcement of the blockade of the Strait of Hormuz suppressed risk sentiment, the temporary ceasefire still led to a noticeable relief rebound in the markets this week. Goldman Sachs’ macro trading team believes that the most severe tail risks have narrowed significantly, and the market has officially entered a "new phase of crisis."

Goldman Sachs macro traders Rikin Shah and Cosimo Codacci-Pisanelli noted that while there are still doubts about the ceasefire details and stability, the willingness Iran has shown to negotiate is a key signal that helps reduce extreme downside tail risks. Regarding the stock market, this shock has been characterized as an inflation shock rather than a growth shock. If the “peak stress” has passed, the stock market may refocus on the forward-looking perspective and trade on expectations of double-digit earnings growth.

On the central bank policy front, the ceasefire has reduced the urgency for major central banks to take emergency action, but the transmission of energy prices to inflation is ongoing and hawkish tendencies have not completely subsided. Among them, the Fed has the lowest probability of raising rates. However, the tail risk of a large-scale rate hike cycle has been greatly reduced, and rate volatility is expected to continue declining.

Tail risks narrowed, stock market shows resilience

The ceasefire news drove global stock markets to record their largest weekly gain in more than two years last week. Despite the failure of negotiations over the weekend, Monday’s market decline was relatively restrained. The core feature of the market this week is a relief rally following the ceasefire. Previously, uncertainty about Iran’s response fueled negative sentiment, forcing risk premiums to accumulate significantly, with commodities and short-term rates bearing the brunt.

Notably, in this round of turmoil, the stock market has shown greater resilience compared to physical commodities. Looking back on past experiences such as COVID-19 and tariff shocks, the stock market is capable of shifting time perspectives and navigating short-term uncertainties — provided that the outlook ahead becomes clearer.

As for the oil price outlook, the baseline scenario expects energy flows through the Strait of Hormuz to resume by the end of this week, with Persian Gulf exports gradually returning to pre-war levels within about a month. The Brent crude oil forecast prices for the third and fourth quarters of 2026 are $82 and $80 per barrel, respectively, and current market pricing is basically in line with this.

Analyst Daan Struyven pointed out that to see oil prices drop to $70 by the end of the year, five conditions must be met simultaneously: the strait reopens quickly, capacity is not permanently damaged, sanctioned Russian and Iranian oil continues to flow smoothly to the market, Russian and US production significantly exceeds expectations, and demand remains weak. The difficulty of achieving this combination of conditions is quite high, meaning downside risks for oil prices remain relatively limited.

Fed likely to stay put

The market maintains that the Fed is least likely to raise rates, which aligns with current pricing. The US economy is much less sensitive to oil prices than it was in the 1970s, and the federal funds rate is still about 50–75 basis points above the FOMC’s estimated neutral rate midpoint.

Based on market signals, FOMC pricing is close to staying unchanged for the year, with a slight rate cut premium toward year-end; US breakeven inflation rates do not show signs of runaway inflation expectations, and front-end dollar rate volatility has retraced about 50% of last month’s gains. The market expects that if Waller becomes the next Fed chair, the threshold for rate hikes will still be quite high.

Last week’s nonfarm payroll data was strong, easing immediate concerns about the labor market, with three-month trend wage growth close to the breakeven level estimated by Goldman Sachs’ commodity research team. Overall, the likelihood of US growth risks emerging in the near term is low, front-end rates should remain flat in the short run, and realized volatility will stay at low levels.

However, long US rate positions for 2027 can still be used as tools to hedge growth downside risks — current market pricing for rate cuts remains insufficient, and fiscal stimulus driving growth will gradually wane later this year.

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