Global financial markets remain focused on the ongoing Middle East conflict and the accompanying jump in energy costs, prompting a major Wall Street firm to dial back its near-term appetite for equities.
Goldman Sachs said the latest geopolitical developments have raised the prospect of a broader energy shock that would push inflation higher while weighing on economic expansion. Its economists estimate that should oil climb to $100 per barrel, global headline inflation could increase by about 0.7 percentage points and global growth could be reduced by roughly 0.4 percentage points.
The bank noted that market conditions have moved away from the earlier-year "Goldilocks" scenario in which robust U.S. growth and easing inflation supported risk-taking. Instead, rising energy prices and geopolitical uncertainty have become the dominant forces shaping asset prices.
Goldman's commodities team warns the current oil rally is approaching magnitudes comparable to the largest shocks since the 1970s. They also said prices could rise further if shipping flows through the Strait of Hormuz remain constrained. "Our commodities team thinks it is likely that oil prices would exceed the 2008 and 2022 peaks if flows in the Strait of Hormuz were to remain depressed throughout March," analysts led by Christian Mueller-Glissmann wrote in a note.
The group additionally raised its outlook for European gas prices and highlighted the risk of temporary spikes to levels that could begin to destroy industrial demand.
Against this backdrop, Goldman said it is making a tactical change to its asset allocation. "We shift tactically neutral equities/overweight cash for 3m but recommend hedging the upside tail for equities in the coming weeks," the analysts wrote. The bank urged investors to consider hedges against strong upside moves in equities as a precautionary step while holding more cash.
Goldman cautioned that a combination of sharply higher commodity prices and an unwind of equity momentum has raised the probability of a market drawdown. Their updated risk model points to more than a 40% chance of a correction, though the analysts emphasized that the indicators currently suggest a potential pullback rather than the onset of a full bear market.
The team also warned that traditional diversification may provide less protection in an energy-driven shock. Correlations between equities and bonds have begun to turn positive, which can undermine conventional 60/40 portfolios and risk-parity strategies in a manner similar to the dynamics experienced during the 2022 inflation shock.
Within equities, defensive styles have so far outperformed this year. The analysts pointed to low volatility stocks, infrastructure names and dividend aristocrats as areas that have done relatively well and that could continue to outperform if the S&P 500 weakens further.
At the same time, Goldman noted that markets could move sharply in the opposite direction if geopolitical tensions de-escalate quickly. A rapid easing of the situation could prompt a pronounced rebound, underscoring that investors should prepare for elevated volatility in both directions.
Implications and context
The bank's guidance signals a more defensive posture for the coming three months, with a tilt toward liquid cash holdings and an emphasis on hedging equity exposure. The assessment highlights the sensitivity of inflation and growth outcomes to oil prices and the potential for energy-led volatility to reverberate across asset classes.