Goldman Sachs supports U.S. stocks: Don't fear war and AI disruptions! Every pullback is a good buying opportunity

According to Goldman Sachs strategists, investors should view any pullback in the U.S. stock market as a buying opportunity rather than a sign of a bear market beginning. Led by Peter Oppenheimer, the Goldman Sachs strategist team wrote in a report that despite significant headwinds from the Middle East war and concerns over AI’s disruptive impact, the resilience of economic fundamentals and strong earnings growth suggest that the depth and duration of any correction will be limited.

Oppenheimer stated, “Given current valuation levels, we see a higher risk of a market pullback, but we expect this to present a buying opportunity, with a lower risk of a more prolonged and deeper bear market.”

The S&P 500 Index trading above its long-term average

Global stock markets have been volatile at the start of the year. Initially, fears over AI’s disruptive impact on business models led to sell-offs across multiple sectors, including software. Subsequently, the outbreak of war in the Middle East put further pressure on markets.

Nevertheless, Goldman strategists noted that from an index perspective, the overall market remained relatively stable until recently, but rapid sector and stock rotation and increased volatility became prominent features. They added that stock returns across regions and factors have diverged globally, leading to valuations above average, with all sectors trading at expensive levels relative to their 20-year history. Coupled with a historically strong bull market led by the U.S., the market remains vulnerable to potential shocks, such as threats to oil and natural gas markets from the Iran conflict.

Oppenheimer pointed out, “The longer this uncertainty persists or the more severe the impact on energy supply, the higher the perceived risks to growth and inflation.” However, he also added, “Most geopolitical shocks in recent years have not had lasting effects on the markets.”

Major banks maintain bullish outlook on U.S. stocks

Despite the escalation of tensions in the Middle East causing volatility in U.S. stocks, BTIG chief market technician Jonathan Krinsky views this as a good entry point for investors. Krinsky quoted an old saying—“When missiles fly, it’s time to buy.” In a client report, he wrote, “Typically, geopolitical-driven volatility is not lasting,” and added that the market’s chaotic movements are “more likely a tactical buying opportunity rather than a reason to sell at current levels.”

Morgan Stanley and Standard Chartered Bank have also recently reaffirmed their bullish stance on U.S. stocks. Led by Mike Wilson, Morgan Stanley’s equity strategists wrote in a report that historically, geopolitical risk events have not caused sustained volatility in U.S. stocks, citing the average performance of the S&P 500 in the months following such events. Regarding the latest Iran conflict, they noted that a bearish scenario mainly involves a sharp and sustained rise in oil prices, which could undermine the strengthening business cycle they expect.

They stated, “Unless oil prices surge by a historically significant margin and stay high, recent events are unlikely to change our bullish outlook for U.S. stocks over the next 6 to 12 months.” The team set a target of 7,800 for the S&P 500 by the end of 2026 in a January report, citing “multiple synergistic drivers” fueling a rolling cycle recovery in the U.S. stock market. They define 2026 as a “broad-based bull market under a rolling recovery,” with a market risk appetite returning from point to surface and multiple cyclical sectors resonating upward, led by cyclical stocks in the second phase of the bull market.

Standard Chartered analysts also noted that U.S. stocks can withstand shocks from the Middle East escalation, and investors could consider buying on dips of 5%-10%. Steve Brice, the bank’s chief investment strategist, said the market is relatively well digesting the unprecedented geopolitical tension, with the core investment logic remaining to buy on dips during significant pullbacks. While acknowledging rising uncertainty, he suggested stocks could fall 5%-10%, creating buying opportunities.

He emphasized that the market entered this panic period on a solid fundamental footing. He said, “We are actually in a ‘golden girl economy’ environment. Economic growth is unusually resilient, U.S. inflation is indeed declining, albeit slowly. We expect the Fed to cut rates, and corporate earnings remain solid.”

However, if oil prices stay high, this could gradually erode this favorable economic environment. Brice noted that investors are currently focused on assessing potential pullback sizes under different scenarios, saying, “This is exactly what the market is trying to figure out—how much stocks could decline under baseline and tail-risk scenarios, and how to position accordingly.”

While closely monitoring developments, Brice maintains a risk-on stance. He describes the current environment as “likely a short-term phase overall, though very different from anything we’ve experienced before.” He also admits that if the situation worsens, flexibility and willingness to adjust positions are necessary. He emphasized that this situation differs significantly from previous Middle East military interventions, noting, “Past military actions in the Middle East usually involved ground troops and could be controlled relatively quickly. This time, the risk of retaliatory actions has increased markedly.”

Deutsche Bank warns: Beware of catching the middle of the mountain

However, Deutsche Bank warns against a “buy-the-dip” strategy in this Middle East conflict, cautioning investors to be wary of “buying into the middle of the mountain.” The bank believes the key issue this week is whether oil and natural gas prices will surge to levels that hinder economic growth and disrupt the recovery trade.

Henry Allen, a strategist at Deutsche Bank, wrote in a Tuesday client report, “We previously stated that geopolitical events usually do not cause sustained market reactions. But an exception occurs when such events have macro channels influencing the market. Iran’s situation is a typical example.”

After the U.S. struck Iran last Saturday, oil prices surged. Concerns about future supply intensified after Iran threatened to block the Strait of Hormuz—a vital route for 20% of global oil and LNG shipments. However, Allen pointed out that current WTI crude prices remain below the average for 2024, and the increase has not reached crisis levels seen during the Russia-Ukraine conflict or the two Gulf Wars.

He stated that if oil prices were to surge more significantly, certain conditions would need to be met for the S&P 500 to fall more than 15%. Allen believes at least one of the following three conditions must be satisfied, but none are currently present: a 50%-100% increase in oil prices sustained over months; a rise in oil prices that pushes the already cooling economy into recession or severe slowdown; or hawkish central bank policies responding to rising oil prices. He said, “The key question in the coming days will be whether any of these conditions are triggered.”