The war in Iran has entered its third week, yet the S&P 500 (^GSPC) remains less than 5% below its all-time high, and equity valuations are still historically elevated. At the same time, equity risk premiums have narrowed as bond markets push out expectations for when central banks may resume easing policy.
That “priced-for-perfection” set-up could leave equities vulnerable if the conflict evolves into a broader macroeconomic shock, Goldman Sachs strategists wrote in a recent client note.
“The longer oil stays elevated, the greater the risk that inflation spillovers weaken the bond market and trigger an equity de-rating at the index level,” the strategists wrote. They added that recent labor market data is losing momentum, potentially reducing the economy’s resilience to additional shocks.
Still, the bank noted that US equities have historically proven resilient during geopolitical crises, and energy-driven sell-offs are often short-lived. A quicker resolution to the conflict could reinforce the expectation that any economic damage will be temporary.
“Overall, equities face rising correction risk as valuations are stretched and macro conditions are deteriorating at the margin,” the strategists wrote, pointing to emerging pressures across growth, inflation, credit, and labor indicators.
“But strong fundamentals argue against a sustained bear market,” they added. “Earnings remain resilient, corporate balance sheets are solid, and history suggests geopolitical shocks often create opportunity rather than lasting damage.”