Wall Street warns the market will go through a "painful path"! Amid geopolitical storms, U.S. stocks may first pull back and shake out before reaching new highs

Wall Street trading teams from financial giant Goldman Sachs warn that the U.S. stock market may need to undergo further pullbacks before embarking on a new sustained rally. In their latest research report, Goldman’s trading team states that the core logic behind predicting a significant correction before a new rebound in U.S. stocks is due to fragile market sentiment and fluctuating global capital flows. After the S&P 500 index failed to break through the historic 7,000 level recently, the benchmark has become vulnerable. The broadly supportive macroeconomic backdrop for a bull market has almost no positive effect on the stock market in absorbing ongoing Middle East geopolitical tensions and sharp commodity price swings.

Led by Gail Hafif and Brian Garrett, Goldman’s trading team wrote in a research report sent to clients: “The only way forward from here is a downward adjustment first, then a rally.” Although the macro environment provides some support overall, it is hardly enough for the stock market to digest the latest geopolitical tensions and volatile commodity prices, resulting in what traders call a short-term “painful” correction path.

On Monday, the S&P 500 closed nearly flat, rebounding sharply from earlier significant declines. Traders are still weighing the potential impact of escalating Middle East geopolitical conflicts on financial markets, which have already triggered a rapid surge in Brent crude oil prices—the international benchmark—on Monday. Due to near-stalled oil and LNG shipping through the Strait of Hormuz and a major Saudi refinery experiencing operational disruptions, energy markets faced severe supply shocks, causing oil prices to rise. Brent crude futures gained about 6.7%, closing near $78 per barrel—the largest single-day increase since June last year.

As U.S. President Trump announced that military actions against Iran would not cease until objectives are met and could last for weeks, and as conflict spread to other Middle Eastern economies—such as drone and missile attacks by Iran on U.S. military infrastructure in Dubai, Abu Dhabi, Bahrain, and Kuwait—uncertainty increased. Lebanon also launched a new round of rocket attacks on Israel, further fueling unpredictable geopolitical turmoil and potential ripple effects from rising oil prices. These developments prompted fund managers to sell off risk assets heavily and seek traditional safe havens like gold and the U.S. dollar, as well as oil, which could benefit in the short term from Middle East tensions.

The rapidly evolving and unpredictable new wave of Middle East geopolitical conflicts has heightened global investor anxiety and concerns, reinforcing their strong demand for traditional safe-haven assets such as the dollar, gold, and Swiss francs—assets that have been classic hedges for decades. In the short term, market strategies are likely to favor risk aversion (the so-called “buy safe assets first, then question later”), with capital flowing swiftly and massively out of stocks into U.S. Treasuries, gold, safe currencies, and commodities like oil and natural gas that stand to benefit from Middle East tensions.

According to top Wall Street institutions like Goldman Sachs, the current market resembles a high-probability phase of “experiencing a shakeout or correction first, then attempting an effective break above 7,000 points to start a new bull market.” After the recent failed attempt to break 7,000, the “Anthropic storm”—a panic selloff driven by fears of AI disruption—continues to ferment in global equity markets. Coupled with repeated capital flows and geopolitical risks, the S&P 500 is more likely to initially follow a “painful path” in the short term.

Meanwhile, although rising oil prices may disturb risk appetite, historical data shows that U.S. stocks tend to still deliver positive returns about a month after an initial selloff following a single-day surge in oil prices. This suggests that short-term pressure followed by recovery is more consistent with current market structure than a direct, decisive breakthrough above 7,000. The real factors determining whether U.S. stocks can sustain a strong bull after a correction are whether oil prices continue to spike, whether the Strait of Hormuz remains disrupted long-term, and whether inflation and rate cut expectations worsen as a result.

Historical Data Shows Oil Price Surges Due to Geopolitical Shocks Are Not Bullish for Markets

Despite the unsettling rise in oil prices causing concern among global investors, historical evidence indicates that the overall damage to market capitalization may be limited. Goldman’s traders note that since 2000, in 22 instances when WTI crude oil prices surged by 10% or more in a single day, the S&P 500 index often experienced positive returns after an initial selloff.

According to Goldman’s data, after geopolitical turmoil caused WTI crude to spike over 10% in a single day, the index on average fell 0.24% the next day, but one-month returns averaged 1.23%, with a median gain of 3.57%. Similar patterns are observed with Brent crude oil surges.

Senior trader Dom Wilson from Goldman believes that higher oil prices will undoubtedly exert significant short-term selling pressure on stocks and credit markets. However, he emphasizes that only severe and sustained disruptions in oil supply would cause substantial damage to global economic growth and the bull market trajectory.

Another major Wall Street firm, Morgan Stanley, also reports that while recent Middle East tensions have driven up oil prices and triggered a short-term risk-off wave globally, such geopolitical shocks rarely cause sustained declines in U.S. stocks. The decisive factor remains whether oil prices experience “historic and sustained” surges. Morgan Stanley’s chief equity strategist Mike Wilson states that historical data shows that geopolitical risk events leading to oil price spikes typically do not cause prolonged volatility in stocks. On average, the S&P 500 has gained about 2%, 6%, and 8% one, six, and twelve months after a single geopolitical event.

Wilson further notes that unless international oil prices increase by 75% to 100% year-over-year and remain high, the bullish case for U.S. stocks remains strong. He maintains a year-end target of 7,800 for the S&P 500 and prefers defensive sectors like healthcare if investors remain cautious. Similar to Goldman Sachs, Morgan Stanley believes that before a more robust bull market can develop, the market may experience significant downward adjustments driven by geopolitical turmoil, tariffs, and pessimism from “AI disruption” narratives.

Wilson views the “long-term bear scenario” related to Iran and Middle East geopolitical events as primarily occurring when oil prices rise sharply and persistently, threatening the business cycle’s sustainability. His threshold for this scenario is twofold: first, a 75% to 100% year-over-year increase in oil prices; second, these shocks occurring late in the economic growth cycle. Without both conditions, geopolitical events are more likely to cause temporary pullbacks rather than structural downturns.

Wilson states that the current market environment does not meet these “high-risk” criteria. He believes we are in an “early-cycle environment,” with profit recovery accelerating, and that “multiple synergistic factors” are driving a rolling, cyclical recovery in U.S. equities. Morgan Stanley sees 2026 as a “broad-based bull market under a rolling recovery,” with a return to more normal risk appetite and multiple industry cycles resonating, led by cyclical stocks in the second phase of the bull.

March’s Seasonal Challenges

However, Goldman traders note that March’s seasonal performance in global equities has been mixed this year. Since 1928, March ranks as the fourth-worst month for the S&P 500, with the first half typically showing relatively choppy performance. Specifically, from March 1 to March 14, the S&P 500 has historically gained only about 30 basis points on average, but performance tends to improve afterward, with the two weeks starting March 15 averaging an 80 basis point gain.

Meanwhile, senior analyst Steve Brice from Standard Chartered Bank states that markets are relatively well absorbing the unprecedented geopolitical shocks from Middle East tensions. The current decline is about 2%, and the core investment logic remains to buy on dips during clear corrections. Brice admits that uncertainty is rising but suggests that U.S. stocks could fall 5% to 10%, creating buying opportunities.

He emphasizes that markets entered this panic with strong fundamentals. “We are in a ‘golden girl economy’ environment,” he says. “Economic growth is surprisingly resilient, U.S. inflation is indeed declining—albeit slowly—and we expect the Fed to cut rates, with corporate earnings remaining solid.”

Nevertheless, sustained high oil prices could gradually erode this favorable economic backdrop. Brice notes that investors are currently assessing potential drawdowns under different scenarios. “This is exactly what the market is trying to figure out—how much stocks could fall under baseline and tail-risk scenarios, and how to position accordingly.”

Other Key Points from Goldman Sachs’ Latest Research

Since the beginning of this year, amid volatile conditions in the first two months of 2026 compared to 2025, retail investors consistently buying U.S. stocks on dips have shown waning enthusiasm.

Share repurchases by companies may have provided some support to the U.S. stock market. Last week’s repurchase activity was roughly 1.7 times the average level of 2025 and 1.5 times that of 2024. However, this support is expected to fade. A quiet period is projected to start around March 16 and last until late April, during which companies will suspend buybacks.

U.S. companies have announced about $317 billion in stock buyback plans so far this year—second only to 2023—yet Goldman warns that buybacks alone are unlikely to ignite a rally. Once this support wanes, market weakness could be amplified.

On the positive side, tax refunds in spring could support U.S. consumer spending and market sentiment. About a quarter of refunds are issued in March, with roughly three-quarters distributed by the end of April.

Goldman’s models indicate that systematic funds (the so-called “hot money”) have largely exited U.S. equities, while commodity trading advisors (CTAs) are gradually turning into buyers. However, this dynamic could quickly reverse as market trends change.

From a technical, liquidity, and trading behavior perspective, the 7,000 level now appears more as a psychological threshold and a short-term resistance after a failed breakout. As Goldman notes, March has historically been the fourth-worst month for the S&P 500 since 1928, with especially volatile first halves. Additionally, although recent buybacks have provided support, the upcoming quiet period around March 16 could reduce a key source of buying. Coupled with weaker retail enthusiasm compared to 2025, the market may be better served by a correction to release crowded positions and fragile sentiment, then look for a breakout—considered a healthier path. For example, JPMorgan suggests a 1-2 week risk asset pullback followed by a significant “buy-the-dip” opportunity.