Goldman Sachs lays out the case for a continued stock rally even as Iran-war uncertainty continues
NYSE
- Stocks are trading near records again, but uncertainty about the Iran war still lingers.
- Goldman Sachs is optimistic the gains can continue even as a US-Iran peace deal remains elusive.
- Analysts at the bank suggest markets have turned their eye toward future catalysts.
The stock market may have finally stabilized, even as tensions between the US and Iran remain high.
Stocks are back near record highs after last week's rally, and Goldman Sachs is optimistic that the positive momentum can continue, even if geopolitical volatility persists. In the bank's view, the renewed rally isn't surprising, even as there are visible signs of disruptions caused by the war.
"If the market can maintain its confidence that a resolution is coming, even meaningful delays to the resumption of oil flows, and the possibility of larger shortages and economic disruptions, may not have a sustained impact on equity pricing," Analyst Dominic Wilson wrote on Sunday evening.
Wilson noted that some may consider it premature to price in ongoing relief, given that there is still no concrete peace deal in place between the US and Iran. However, he said his team doesn't believe it's wrong to think the market can continue to plow ahead and move higher as investors turn their focus to upcoming catalysts and the opportunities they see in the post-war market landscape.
"The outlook beyond the war is becoming a larger driver of the potential opportunities ahead," the bank wrote, with analysts adding that they expect lower growth, higher inflation, higher oil prices, and rates from central banks.
"Rising earnings expectations have also lowered US equity valuations. This makes the outlook less cyclically supportive but more tech-friendly than early in the year and favors assets on the right side of the terms-of-trade shock."
While it remains uncertain how and when geopolitical tensions will be resolved, the analysts added that expectations were previously so low that even small, positive signs are taken as bullish indicators.
"The market is more likely to view bouts of escalation in the context of negotiations for a peace deal and may be wary to react too much to disappointing news given that those periods have been quickly reversed so far," he added.
The bank also highlighted that, while the Iran war has dragged on for weeks, both sides appear to want to reach an agreement that could end it. He noted that, from his team's perspective, there is still a risk that the market could again focus on downside risk stemming from peace negotiations breaking down or economic fallout escalating in a nonlinear manner.
However, he added that his team doesn't believe that either one is likely to deter the rally based on its recent performance.
"The key assumption that the market is making is that this threshold will not be breached," Wilson added.