Episode summary
Why Aren’t Investors More Worried?
Exchanges (Goldman Sachs)
· · Hosts: Allison Nathan · Guests: Dominic Wilson
Summary
Dominic Wilson argues that the market’s resilience after the Iran conflict and the US blockade of the Strait of Hormuz is not as irrational as it looks. He says equities are forward-looking and can price through temporary damage if investors think the conflict is moving toward negotiation rather than open-ended escalation. In his view, the market has already reduced the weight it assigns to the worst-case military and economic tails, though he thinks that tail risk is still not fully priced.
He says the rates market is telling a different story: investors have become more concerned about inflation and hawkish central banks than about growth damage, and Goldman Sachs Research still sees more room for rates to end up lower than higher. On currencies, he says the conflict has given the dollar short-term support through safe-haven demand and oil-shock dynamics, even though the broader medium-term case for dollar weakness remains intact.
Wilson also says the conflict has complicated the earlier narrative of money moving out of the US and into other regions, because non-US developed markets are more exposed to the shock. At the portfolio level, he recommends staying selectively long the risks investors like, but remaining aggressively hedged because the range of outcomes remains unusually wide.
Key takeaways
- Wilson says the S&P 500’s recovery is consistent with a market that is pricing a negotiation path rather than the worst military outcomes.
- He says the rates market has become too hawkish, with more scenarios for rates ending lower than higher in Goldman Sachs Research’s forecast view.
- He says the dollar has gained near-term support from the conflict, but the medium-term bearish case for the dollar is still intact.
- Wilson says the conflict has been more damaging for non-US developed markets, especially Europe and North Asia, than for the US.
- He advises investors to keep selective long exposure but add deeper downside hedges in equities and credit.
- He says AI and semiconductor stocks have already come back strongly, while software remains under pressure from AI competition.
Notable quotes
“what you tend to see is the market worry a lot and then first stage of relief comes mostly from removing the weight that people put on the very bad tails that are out there”
“there's real risk there, right? So can we be confident that we're out of the woods on that, that some of those scenarios we were worried about won't come back? And the answer is no”
“the market has worried more about hawkish central banks in response to this than about growth”
“there are more ways that rates could end up lower than the market is pricing than higher”
“you should have selective long risk and the things you like and you should be pretty aggressively hedged because there are these downside risks that are still very prominent and could easily unsettle things”
How the episode opens
Markets reacted very sharply to news of the Iran ceasefire agreement last week. Only to be met with news to start this week of a US blockade of the Strait of Hormuz, which is critical for global energy flows. So how are markets navigating this uncertainty and what can investors expect ahead?
I'm Allison Nathan, and this is Goldman Sachs Exchanges. My guest today is Dominic Wilson, senior markets advisor in Goldman Sachs Research. Dom, welcome back to Exchanges.
Thank you. So Dom, we have had nothing short of a roller coaster of developments and headlines related to the war in Iran. And I have to say the most recent ones in terms of this blockade I just mentioned, are not very encouraging about seeing a quick resolution to this conflict.
But if you look at the markets and the S&P 500 in particular, it is pricing just below where we were before the conflict even began. So let me just start by asking, does that surprise you at all? And is the market really underestimating the downside risk here?
So the two parts of those questions I think are different from each other. So the first, is it a surprise? What I would say is that the thing that we've been reminding ourselves is that as you move through crises, as you move through these kinds of events, what you tend to see is the market worry a lot and then first stage of relief comes mostly from removing the weight that people put on the very bad tails that are out there.
And so seeing a recovery period where there's a lot of things unresolved, I think that in itself is not unusual. If you think of covid, if you think of tariffs, the recovery periods often came before a lot of the worst things on the ground had happened.
From the episode’s captions: roughly the first two minutes, lightly cleaned. Keep watching on YouTube →
Topics
- iran conflict
- strait of hormuz
- market reactions
- portfolio positioning
- geopolitical uncertainty
Companies and tickers mentioned
- GS
- Goldman Sachs
Watch the episode
Watch “Why Aren’t Investors More Worried?” on YouTube
Summary, takeaways and quote selection by Octagon. Quotes are short excerpts; the full conversation is in the episode.
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