Goldman Sachs: The biggest current market threat is the “Iran risk stacked with an interest rate storm.” Even if the stock market rises again, volatility will increase.

Iran’s ceasefire agreement compresses deep-tail risks, driving a broad rebound in global risk assets; however, Goldman Sachs warns that this rally carries a “consolation cost”: the market is clearly underpricing the downside risks of a renewed escalation in Iran, and the upward pressure on bond yields stemming from energy scarcity combined with economic resilience is also not something to be underestimated.

According to the Wind trading desk, based on Goldman Sachs’s May 15 Global Markets Outlook report, since the Iran ceasefire, U.S. stocks, emerging-market equities, high-yield and commodity currencies have recovered across the board, AI-related exposures have hit new highs for this cycle, and AI-intensive markets such as Korea and Nasdaq have broken through pre-war highs first. The shared logic driving this rebound is “scarcity”—shortages in chip memory and energy supply chains are, at large scale, directing capital flows.

In the report, Goldman strategists Dominic Wilson and Kamakshya Trivedi pointed out that the market’s implied pricing for U.S. economic growth has risen to 2.5%, matching the firm’s growth forecast for 2027 and possibly even showing overshoot. At the same time, the market’s pricing of Iran tail risks is clearly too low—the longer the Strait of Hormuz remains closed, the greater the repricing shock triggered by energy shortages; and the higher market tolerance threshold after the rebound also means that once optimistic expectations are hit by a larger shock, the magnitude of repricing will be even more severe.

Against the risks above, Goldman recommends pairing equity longs with longs in long-dated S&P 500 volatility. Out-of-the-money put options on European stocks, credit, and FX still offer the best value for money in cross-asset comparisons. In the context of the ceasefire deadlock persisting and no comprehensive solution having been put in place, the scarcity theme is likely to continue dominating cross-asset price trends.

Iran escalates again: the most underestimated downside tail risk

Goldman notes that risk assets have been fully priced on the assumption that “deep-tail risks are avoided,” but the probability of worse outcomes is still real and has been underestimated by the market. The report warns that precisely because the market has raised its tolerance thresholds for negative news, if the situation undergoes a more severe reversal, the extent of repricing will be more intense than expected.

Goldman also highlights a cyclical dilemma: the market is currently inclined to ignore temporary disruptions, yet it may be exactly a new round of market panic that is needed to push all parties to reach an agreement and restart oil flows. Without a clear peace deal and a convincing restart of the Strait of Hormuz, as time passes the shortages in energy products will become increasingly evident, and the probability that the market will again face this risk will rise accordingly.

On hedging strategies, the firm believes that out-of-the-money put options on European stocks, credit, and FX perform best in cross-asset comparisons. Oil longs also have a certain protective effect, but in a scenario where the crisis is fully resolved, they face downside risks in the opposite direction as well.

Growth pricing has overshot; policy easing room is limited

Goldman’s standard estimate for growth pricing in the U.S. has reached 2.5%. The report states that, judging from the co-movement in stocks and bonds, the market has “fully priced in” near-term economic weakness—directly pointing to a better growth outlook for 2027 and potentially exhibiting an overshoot. The strength in technology and commodities may exaggerate this metric to some extent, but overall signals are consistent with the market’s view to “look forward.”

On the policy outlook, Goldman says that if the Iran issue is resolved, there is some room for policy easing in the coming months—its interest rate forecasts are generally more dovish than market pricing. However, as the U.S. economy and labor market resilience are exceeding expectations and near-term inflation is still likely to remain high, unless there is a clear improvement in oil and gas supply and the war comes to an end, the room for recent policy loosening will be extremely limited.

The combination of bond yields and the stock market rising in tandem has prompted questions about sustainability. Goldman believes inflationary pressure is likely to ease gradually in the months after energy prices peak, and that the market has already priced in rate hikes (including in the U.S.), so the upward pressure on yields will ultimately be contained. But before that, in the coming weeks the market may continue to worry about a scenario where “more hawkish policy pricing” and “weaker growth pricing” intertwine.

AI capital expenditure hits record highs; valuation overhang risk is rising

AI is returning with strong momentum and has become the core focus of the current market. Goldman’s data shows that the share of GDP accounted for by technology investment has surpassed the late-1990s historical peak. During the Q1 earnings season, the market consensus for 2026 capital expenditure of hyperscale cloud service providers was revised upward from $673 billion to $755 billion, and the 2027 forecast also jumped from $790 billion to $890 billion. Shortages in semiconductors and memory are particularly pronounced, and beneficiary companies’ earnings forecasts have been revised significantly upward as a result.

Unlike the late 1990s, corporate profits as a share of GDP are also at record highs, and macro-imbalance indicators that were present then have not yet appeared; concerns in the private credit space have also eased, and Goldman believes the likelihood of it triggering systemic risk is relatively low.

Even so, the report cautions that the cumulative valuation premium for AI-related companies continues to climb, and the market faces two potential mispricing risks: first, the “aggregation fallacy,” i.e., assuming the number of individual-stock winners exceeds the overall economy’s practical upper limit; second, the “extrapolation fallacy,” i.e., assuming the profitability supported by the investment fervor is sustainable. As long as earnings and spending plans continue to exceed expectations, the AI sector can still maintain upside momentum, but the market is building a valuation overhang that will inevitably face digestion pressure.

Hawkish rate repricing accelerates the narrowing of the 2026 rate-cut window

Goldman states that, with most assets already repaired to a degree that is sufficient or even excessive, the overall hawkish repricing in the interest-rate market has remained broadly unchanged. In the current setup—where the Strait of Hormuz is still blocked, energy prices remain high, growth continues to show resilience, and inflation data has begun to rise—front-end rates have a possibility of being reset or even surpassing prior highs.

Compared with the earlier-in-the-year baseline forecasts that were relatively dovish, Goldman now expects fewer rate cuts, or none at all, across most developed and emerging markets; market pricing has shifted even further toward hawkish. The firm believes the threshold for U.S. rate hikes remains extremely high, but persistent inflation pressure combined with the labor market not deteriorating materially also makes implementing easing even more difficult. Goldman says the time window for rate cuts in 2026 is rapidly narrowing.

On the long end, upward pressure on term premiums in the U.K. and Japan has pulled up both terminal rates and long-term rates together. If the Iran situation is resolved and inflation’s sequential shocks fade quickly, front-end rates could ease somewhat; however, fiscal spending related to defense and energy security, as well as sustained private investment in AI infrastructure, will constrain the potential decline in long-end rates.

Stock volatility rises structurally, but the market reaction has not been sufficient

One of Goldman’s earlier key judgments for 2026 is that implied volatility in long-dated stocks would rise structurally. Since September last year, the implied volatility for long-dated options on the S&P 500 has shown a clear upward drift. However, the increase in average implied volatility of individual stocks and concentrated indices such as Korea has been larger, more persistent, and clearly differentiated from broad-based index performance.

Goldman believes this divergence is partly because the market is focusing more on “distributive volatility”—the volatility involved in the allocation of winners and losers within the AI theme—rather than macro “total-value volatility.” As a result, the correlations among individual stocks have fallen to historic lows, limiting how much upward broad index volatility can go. This combination of high individual-stock volatility and low correlations is somewhat reminiscent of certain phases in the late 1990s, implying that in some shock scenarios the increase in index volatility may be less than expected.

The firm maintains its recommendation: pair equity longs with long-dated S&P 500 volatility longs, and continue to watch for opportunities to allocate to falling-volatility positions across different assets, so as to limit downside losses while keeping exposure to potential further upside in equities.

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