Wall Street warns that the market will experience a "painful path"! Under the geopolitical storm, US stocks may first undergo a pullback and then reach new highs.

A warning from the trading team of the financial giant Goldman Sachs on Wall Street suggests that the US stock market may need to further pull back before embarking on a new sustained upward trend. In their latest research report, the Goldman Sachs trading team mentioned that the core logic for predicting a significant pullback in US stocks before a new rebound lies in the fragile market sentiment, the volatile global fund flows, and the inability of the S&P 500 index to break through the historical milestone of 7,000 points. Following this, the benchmark index has become fragile, and the broad support for the bull market logic in the US macroeconomic background has failed to have a positive effect on the stock market in absorbing the ongoing tense geopolitical situation in the Middle East and significant fluctuations in commodity prices. Gail Hafif and Brian Garrett, leading the Goldman Sachs trading team, stated in a research report sent to clients: "From here, the only way up is to first adjust downwards, and then gather momentum upwards." While the macro background supports to some extent, it is not as helpful for the stock market to digest the recent geopolitical tensions and significant commodity price fluctuations, creating what the team referred to as a "painful path" of a short-term pullback. On Monday, the S&P 500 index closed almost flat, significantly rebounding from a sharp decline earlier in the session. Traders are still weighing the potential impact of the escalation of the Middle East geopolitical conflict on the financial markets, particularly with the recent surge in global oil prices triggered by the conflict. As crude oil and LNG shipping in the Strait of Hormuz have nearly stalled, and a major refinery in Saudi Arabia has experienced a disruption in production capacity, the energy market has been severely impacted resulting in a rise in oil prices. Brent crude futures prices closed up about 6.7% at nearly $78 per barrel, marking the largest single-day increase since June of last year. With US President Trump announcing significant military action against Iran as "not stopping until the goal is achieved" and possibly lasting for four weeks, and as conflicts spread beyond Iran and Israel to other Middle Eastern economies - such as Iran launching drone and missile attacks on critical US military infrastructure in Dubai, Abu Dhabi, Bahrain, and Kuwait, Lebanon initiating the latest round of rocket attacks on Israel, and the continuing unpredictable geopolitical turmoil in the Middle East, along with the potential ripple effects of rising oil prices, fund managers now have new reasons to sell off risky assets like stocks en masse and shift towards traditional safe-haven assets such as gold, the US dollar, as well as commodities like oil that are expected to benefit significantly from the Middle Eastern geopolitical crisis. The ongoing rapidly developing new round of geopolitical conflicts in the Middle East has heightened anxiety and concerns among global investors, further reinforcing their strong demand for traditional safe-haven assets such as the US dollar, gold, and the Swiss franc. In the short term, financial market strategies will clearly lean more towards prioritizing safety (the so-called "buy safe-haven assets first, then raise questions and doubts" strategy), with funds likely to continue to flow rapidly and massively from risky assets like stocks towards US Treasuries, gold, safe-haven currencies, and commodities such as oil and natural gas that stand to benefit greatly from the Middle East geopolitical crisis. In the view of top investment institutions on Wall Street such as Goldman Sachs, the current market appears to be in a high probability stage of "first experiencing a shakeout/retreat, and then attempting to effectively break through 7000 points and thus achieve a new bull market". Following the recent failure to break through 7,000 points, the "Anthropic storm" that severely impacted tech stocks is still fermenting in the global stock markets - the panic-selling sentiment brought about by "AI disrupting everything" remains, coupled with the repeated fund flows and geopolitical risks, making it easier for the S&P 500 to first navigate a "painful path" in the short term. However, despite the disruption in risk appetite caused by the surge in oil prices, historically, US stocks have often recorded positive returns in the month following a significant oil price increase after the initial sell-off. This suggests that short-term pressure may be followed by a recovery, which is more in line with the current market structure compared to a direct breakthrough of 7000 points. The key factor determining whether US stocks can continue to experience a strong bull market after a pullback is not the conflict headlines themselves, but rather whether the oil price shock persists, whether there is a sustained interruption in Hormuz shipping, and whether this leads to a continuous deterioration in inflation/interest rate expectations. According to Goldman Sachs' trading team, history shows that geopolitical shocks leading to soaring oil prices have not been able to prevent bull markets. Although the surge in oil prices has made global investors uneasy, data suggests that overall market value damage may be limited. In the 22 instances since 2000 where the North American benchmark for oil pricing, West Texas Intermediate (WTI) crude oil futures prices, rose by 10% or more in a single day, the S&P 500 index has typically seen positive returns after the initial selling. Moreover, Morgan Stanley's latest research report suggests that while the recent tensions in the Middle East have pushed up international oil prices and triggered a short-term flight to safety in global markets, such geopolitical shocks have typically not dragged US stocks into sustained declines. The key variable remains whether oil prices will experience a "historical and sustained" surge. Morgan Stanley's chief equity strategist Mike Wilson stated that historical data shows that geopolitical risk events leading to a spike in oil prices have often resulted in the S&P 500 index rising by an average of about 2% in the month following the event, with increases of 6% and 8% over the subsequent six and twelve months, respectively. Wilson further pointed out that if international oil prices do not see a significant surge of 75% to 100% year-over-year and maintain high levels, the logic for a bull market in US stocks remains very solid. He maintains a year-end target of 7,800 points for the S&P 500 and indicated that if investors maintain a cautious stance, the healthcare sector is favored by the institution as a defensive sector. Similar to the view of Goldman Sachs, Morgan Stanley also believes that US stocks may undergo significant downward adjustments before achieving a stronger bull market trajectory, due to a combination of geopolitical tensions, tariff storms, and the pessimistic market sentiment brought about by the "AI disrupting everything". In Wilson's view, the scenario of a "long-term bear market" related to the weekend's events in Iran and the Middle East is mainly seen in cases where oil prices see a significant and sustained increase, posing a threat to the sustainability of the business cycle. Wilson's historical threshold for such a scenario is the simultaneous satisfaction of two conditions: first, a year-over-year increase in oil prices of 75% to 100%, and second, the impact occurring in the late stages of the economic growth cycle. Without meeting both conditions, geopolitical events are more likely to evolve into temporary retractions rather than structural downturns. Wilson noted that the current market conditions do not align with the aforementioned "high-risk combination". He believes that the market is currently in an "early cycle environment", with robust economic growth and declining US inflation, albeit at a moderate pace. Wilson expects the Federal Reserve to cut interest rates, and corporate profits to remain robust. In contrast, the gradual erosion of this favorable economic environment could occur if oil prices remain high. Brice stated that investors are currently focused on assessing the potential extent of retracements in different scenarios, stating, "I believe this is the issue the market is struggling to figure out - how large a retracement the stock market may experience in the baseline scenario and in the tail risk scenario, and how to invest accordingly."