Following the breakdown of US-Iran ceasefire talks, tensions have escalated again around the Strait of Hormuz. Goldman Sachs has issued a warning that the US stock market is now embroiled in what it terms the "final battle."
According to trading desk sources, on April 13, Shreeti Kapa, a strategist from Goldman Sachs' Global Banking & Markets division, released a market commentary titled "Equities - The Final Battle," offering an analysis of the current geopolitical situation and the trajectory of US stocks.
During this recent Middle East conflict, the S&P 500 experienced a maximum drawdown of approximately 9%, but recovered most losses within days after news of a ceasefire emerged. This pattern aligns closely with historical norms, where geopolitical shocks have typically caused an average S&P 500 decline of 8%, lasting about 18 days. However, the firm believes the risk-reward profile for the market remains unfavorable until a concrete negotiation agreement is finalized.
The current risk-reward setup is suboptimal: the underlying situation remains unresolved, yet markets have rebounded to near all-time highs. While short-term technical fund flows are supportive, it is difficult to anticipate genuine buying interest materializing in the absence of a comprehensive negotiated settlement.
The contest for the Strait of Hormuz is seen as the ultimate signal for judging the conflict's outcome. After the ceasefire talks collapsed, the United States announced a blockade of the Strait of Hormuz. A statement from US Central Command indicated that a blockade on all maritime traffic to and from Iranian ports would commence at 10:00 AM Eastern Time on April 13.
Strategist Kapa noted that the side controlling the Strait of Hormuz would be the victor. However, history shows that no party has ever achieved its strategic objectives solely by blockading or seizing a critical maritime chokepoint. Drawing lessons from past events—such as the 1956 Suez Crisis, Japanese control of the Malacca Strait during WWII, and the 1980s "Tanker War"—Kapa emphasized that victory in a chokepoint crisis does not belong to the side controlling the geography or possessing the strongest navy. The winner is the party most adept at managing escalation dynamics and securing, or at least obtaining, the tacit acceptance of major powers dependent on the waterway.
In 1956, that pivotal power was the United States. In the current context, this role falls to nations like India, Japan, and South Korea—the largest importers of crude oil transiting the Strait of Hormuz. Goldman Sachs posits that their stance will directly determine whether Iran's blockade generates negotiating leverage or leads to isolation, and whether the US blockade can be sustained or becomes untenable.
The report cites a military maxim: in war, the capacity to endure pain is often more critical than the ability to inflict it. A further warning was issued: while the US may possess total naval superiority, it might not be able to clear naval mines quickly enough. Should a supply shock trigger an economic crisis, the initiative could shift once more.
Historical judgment is consistent: the bold and aggressive have never prevailed; victory consistently goes to the most patient. Kapa suggested that a framework akin to the Montreux Convention might offer a path forward—recognizing Iran's geographical leverage while providing security assurances in exchange for its commitment to keep the strait open. However, the report states plainly that every historical precedent indicates this outcome cannot be achieved through military force alone. The question remains how high a price the world must pay to bring all parties back to the negotiating table, which history indicates is the only viable endpoint.
Returning to market dynamics, the S&P 500's maximum drawdown of around 9% during this geopolitical conflict, followed by a swift recovery after ceasefire news, fits the historical pattern. Geopolitical shocks have typically led to an average S&P 500 pullback of 8%, lasting about 18 days, albeit with a wide range. In recent years, most geopolitical shocks have had limited long-term market impact unless combined with tail risks like recession or monetary policy shocks.
Nevertheless, the report expresses caution about the outlook, questioning whether the market is entirely in the clear, given that weekend negotiations seemingly failed to produce an agreement. The assessment is direct: the risk-reward for stocks is "not ideal." The rationale is that the conflict remains unresolved while markets have rallied back near record highs. Although technical inflows can provide short-term support, it is "hard to imagine genuine buying emerging without a full negotiation agreement."
Price action over the past 6 to 8 weeks has clearly delineated market preferences. Winners include AI optical networking, AI data centers, and storage/memory-related stocks—top performers year-to-date with mild drawdowns during the conflict and the strongest rebound post-ceasefire. Energy stocks saw a slight pullback after the ceasefire but maintain strong full-year performance, underscoring long-term structural demand for physical infrastructure. Losers include software, IT services, and stocks with "AI exposure," which faced persistent selling pressure during the conflict, with shorting activity intensifying after the ceasefire.
Separately, Goldman Sachs strategist Peter Oppenheimer previously noted that the technology sector is experiencing one of its weakest periods of relative performance in 50 years, driven by ROI concerns at hyperscale cloud providers and AI disruption risks. Investors are keen to avoid becoming the Kodak, IBM, Nokia, or BlackBerry of the AI era. Concurrently, market assumptions about terminal values for long-duration growth stocks, like software, are being challenged. These stocks previously benefited from strong conviction in persistent high growth and historically low interest rates, both of which are now shifting.
Despite the broader market being just a few percentage points from its highs, Goldman's "long-duration growth" basket remains more than 20% below its October 2025 peak. While 30% of this basket consists of software stocks, even excluding software, non-software growth stocks trade at a median P/E of 29x—a 53% premium to the S&P 500 median, near the low end of the past decade's range. These companies have consensus revenue growth estimates for 2027 that are triple the S&P 500 median. In contrast, power infrastructure-related stocks have significantly outperformed year-to-date.
The firm believes the current valuation compression is creating attractive entry points for investors. Furthermore, the macro backdrop of moderate economic growth is generally favorable for growth stocks overall.