To The Moon

A trading team from the financial giant Goldman Sachs has issued a warning that U.S. equity markets may require a further correction before initiating a new phase of sustainable upward movement. In their latest research report, the team highlighted that the core rationale behind predicting a significant pullback prior to the next rally lies in fragile market sentiment and volatile global capital flows. Following the S&P 500's recent unsuccessful attempt to breach the historic 7,000-point milestone, the benchmark index has become increasingly vulnerable. The broadly supportive U.S. macroeconomic backdrop for the bull market has done little to help equities absorb persistent tensions in the Middle East and sharp fluctuations in commodity prices.

The team, led by Gail Hafif and Brian Garrett, stated in a client note, "From this point, the only path upward involves a downward adjustment first to gather momentum." While the overall macroeconomic context remains somewhat supportive, it offers almost no assistance in buffering the stock market against the latest geopolitical tensions and violent swings in commodity prices, creating what the firm's traders describe as a near-term "painful" corrective path.

On Monday, the S&P 500 closed nearly flat, staging a notable recovery from steeper losses earlier in the session. Traders continue to assess the potential financial market implications of escalating Middle East conflicts, which triggered a rapid surge in Brent crude oil prices. Energy markets faced severe supply-side shocks due to a near halt of crude and LNG shipping through the Strait of Hormuz and production disruptions at a major Saudi Arabian refinery, causing oil prices to climb. Brent crude futures settled approximately 6.7% higher, near $78 per barrel, marking the largest single-day gain since June of last year.

With former U.S. President Trump's significant declaration of military action against Iran, potentially lasting four weeks, and the conflict spreading to other Middle Eastern economies—such as Iranian drone and missile attacks on key U.S. infrastructure in Dubai, Abu Dhabi, Bahrain, and Kuwait, alongside renewed rocket strikes from Lebanon into Israel—the region's unpredictable geopolitical turmoil and potential ripple effects from rising oil prices provide fund managers fresh impetus to offload risk assets like stocks. Instead, they are increasingly seeking traditional safe havens such as gold and the U.S. dollar, as well as commodities like oil, which stand to benefit directly from Middle Eastern instability.

The current volatile and rapidly evolving geopolitical situation is amplifying global investor anxiety, reinforcing robust demand for classic safe-haven assets like the U.S. dollar, gold, and the Swiss franc. In the short term at least, financial market strategy is expected to prioritize risk aversion, with capital likely flowing swiftly and substantially from equities into defensive assets like U.S. Treasuries, gold, and safe-haven currencies, alongside commodities such as oil and gas that benefit from the crisis.

According to top Wall Street firms like Goldman Sachs, the market appears to be in a phase with a high probability of experiencing a shakeout or retracement before making a valid attempt to break through 7,000 points and enter a new bull market. After the recent failed assault on 7,000, the "Anthropic storm" that battered software stocks continues to reverberate globally—reflecting persistent panic selling driven by fears of "AI disruption." Combined with erratic capital flows and geopolitical risks, this makes the S&P 500 more susceptible to a near-term "painful path."

Meanwhile, although surging oil prices can unsettle risk appetite, historical patterns show that following a major single-day oil price spike, U.S. stocks have often delivered positive returns one month after the initial sell-off. This suggests a sequence of short-term pressure followed by recovery is more aligned with current market structure than an immediate, direct breakthrough above 7,000.

Furthermore, the key determinant for whether U.S. stocks can resume their strong bull run after a correction is not the conflict headlines themselves, but whether the oil price shock persists, if Hormuz shipping disruptions continue long-term, and if resulting inflation and interest rate expectations deteriorate significantly.

Historical data indicates that oil price spikes driven by geopolitical shocks have rarely derailed bull markets. Goldman Sachs's trading team noted that since 2000, across 22 instances where the North American crude benchmark WTI rose 10% or more in a single day, the S&P 500's returns following the initial sell-off were generally positive. According to their statistics, after such geopolitical shocks, the index averaged a 0.24% decline the next day, but posted an average one-month return of 1.23%, with a median gain of 3.57%. A similar pattern is observed with Brent crude spikes.

Senior trader Dom Wilson at Goldman Sachs acknowledged that higher oil prices will undoubtedly create significant selling pressure on equities and credit markets in the short run. However, he emphasized that only severe and sustained supply disruptions would inflict substantial damage to global economic growth and the stock market's bull trajectory.

Another Wall Street giant, Morgan Stanley, echoed in its latest research that while recent Middle East tensions have boosted oil prices and triggered a global risk-off wave, such geopolitical shocks typically fail to push U.S. stocks into a sustained downtrend. The decisive variable remains whether oil prices experience a "historic" and "persistent" surge.

Mike Wilson, chief equity strategist at Morgan Stanley, pointed to historical data showing that oil price surges from geopolitical risk events usually do not lead to prolonged stock market volatility. On average, the S&P 500 has gained approximately 2%, 6%, and 8% over one, six, and twelve months following individual geopolitical events, respectively.

Wilson further noted that unless international oil prices surge by 75% to 100% year-on-year and remain elevated, the bull market thesis for U.S. stocks remains robust. He maintains a year-end target of 7,800 for the S&P 500 and suggests that if investors adopt a cautious stance, the firm prefers defensive sectors like healthcare.

Similar to Goldman Sachs's view, Morgan Stanley also believes U.S. stocks may undergo a significant downward adjustment due to a combination of negative factors—geopolitical turmoil, tariff risks, and pessimistic sentiment around "AI disruption"—before achieving a stronger bull market trajectory.

In Wilson's view, a "long-term bear market scenario" linked to the weekend's Iran and Middle East events would primarily materialize if oil prices rise significantly and persistently, threatening the sustainability of the business cycle. His historical threshold requires two conditions simultaneously: first, a year-on-year oil price increase of 75% to 100%, and second, the shock occurring during the late stage of an economic growth cycle. Absent either condition, geopolitical events are more likely to result in a phased pullback rather than a structural decline.

Wilson stated that current market conditions do not meet this "high-risk combination," describing the environment as "early-cycle" with accelerating earnings recovery. He cited "multiple synergistic drivers" contributing to a rolling cyclical recovery in the U.S. stock market. Morgan Stanley characterizes 2026 as a "broad-based equity bull market under a rolling recovery," advocating for a gradual return of risk appetite and synchronized cyclical sector gains, led by cyclical stocks in the bull market's second phase.

However, according to Goldman Sachs traders, March presents a mixed seasonal picture for global equities. Dating back to 1928, it ranks as the fourth-worst performing month for the S&P 500, with the first half historically prone to volatility. Specifically, from March 1 to March 14, the index has averaged a gain of only 30 basis points, but performance tends to improve thereafter, averaging an 80 basis point rise in the two weeks starting March 15.

Meanwhile, Steve Brice, a senior analyst at Standard Chartered, noted that markets are digesting the unprecedented geopolitical shock from Middle East tensions relatively well, with equity declines contained to around 2% so far. The core investment logic remains buying on significant dips. While acknowledging increased uncertainty, Brice suggested U.S. stocks could decline 5% to 10%, presenting a buying opportunity. He emphasized that markets entered this fearful period against a backdrop of strong fundamentals, describing the current environment as a "Goldilocks economy" with robust growth, declining U.S. inflation, expected Fed rate cuts, and solid corporate earnings. Nevertheless, sustained high oil prices could gradually erode this favorable setup.

Brice added that investors are currently focused on assessing potential drawdowns under different scenarios, questioning the extent of equity declines in both baseline and tail-risk situations and how to position accordingly.

Additional key points from Goldman Sachs's latest trading desk report include:

Retail investors, who had been buying U.S. stock dips amid persistent volatility in the first two months of the year compared to 2025, have shown diminished enthusiasm. Corporate stock buybacks may have provided some support; last week's buyback activity was approximately 1.7 times the daily average for 2025 year-to-date and 1.5 times the 2024 level. However, this support is set to fade. The next blackout period is expected to begin around March 16 and last through late April, during which companies will suspend share repurchases.

U.S. firms have announced about $317 billion in buyback plans year-to-date, the second-most active start on record after 2023. But Goldman Sachs's trading desk warned that buybacks alone are unlikely to ignite a rally, and market weakness could be magnified once this support vanishes.

On a positive note, tax refunds may bolster U.S. consumer spending and sentiment during the spring. Roughly one-quarter of annual refunds are distributed in March, with about three-quarters completed by the end of April. Goldman Sachs's models indicate that systematic funds have largely exited U.S. equities, but commodity trading advisors are gradually turning into buyers. However, this dynamic could reverse quickly if market trends shift.

From technical, capital flow, and trading behavior perspectives, the 7,000 level now acts more as a psychological barrier and short-term resistance following the failed breakout. As highlighted by Goldman Sachs, March is historically the S&P 500's fourth-worst month since 1928, with a particularly bumpy first half. Concurrently, while corporate buybacks have provided recent support, the blackout period around March 16 will temporarily remove a key source of buying pressure. Coupled with weaker retail "buy-the-dip" enthusiasm compared to 2025, a corrective phase to release crowded positions and fragile sentiment against the backdrop of Middle East turmoil, before seeking breakout conditions, appears a technically healthier path. For instance, JPMorgan suggests a one-to-two-week pullback in risk assets is more likely, followed by significant "buy-the-dip" opportunities.