Wall Street closes at a record for the first time since end of January
Investing.com -- Global markets continue to be dominated by the Middle East conflict and the surge in energy prices, prompting analysts to turn more cautious on equities in the near term.
The conflict has intensified concerns about a broader energy shock that could weigh on economic growth while lifting inflation, Wall Street giant Goldman Sachs said. The bank’s economists estimate that if oil reaches $100 per barrel, global headline inflation could rise by about 0.7 percentage points while global growth could slow by roughly 0.4 percentage points.
Goldman notes that markets have rapidly shifted away from the “Goldilocks” backdrop investors expected earlier in the year, when strong U.S. growth and easing inflation supported risk appetite. Instead, higher energy prices and geopolitical uncertainty have become the dominant drivers for global assets.
The oil rally is already approaching the scale of the largest shocks since the 1970s. Goldman’s commodities team believes prices could climb even 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.
At the same time, they lifted the outlook for European gas prices and highlighted the risk of temporary spikes toward levels that could begin to destroy industrial demand.
Against this backdrop, Goldman said it is adjusting its tactical 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.
They warned that the combination of sharply rising commodity prices and the unwind of equity momentum has increased the probability of a market drawdown. Its updated model points to a risk of more than 40% for a correction, although analysts stressed that current signals point to a potential pullback rather than a full bear market.
The team also cautioned that diversification may offer less protection in an energy-driven shock. Correlations between equities and bonds have begun to turn positive, putting pressure on traditional 60/40 portfolios and risk-parity strategies, similar to the dynamics seen during the 2022 inflation shock.
Defensive equity styles such as low volatility, infrastructure and dividend aristocrats have outperformed so far this year, the analysts noted, and could outperform again if the S&P 500 weakens further.
However, investors should prepare for volatility in both directions, as a rapid de-escalation of geopolitical tensions could trigger a sharp market rebound, the analysts added.