Adds background and details from shareholder letter in paragraphs 7-8, 13-18

By Arasu Kannagi Basil

March 20 (Reuters) - Goldman Sachs GS.N expects mergers and acquisitions activity to accelerate in 2026 despite the disruption caused by the U.S.-Israeli war on Iran, CEO David Solomon said on Friday.

The Wall Street giant's chief executive said the investment bank expects monetary easing, fiscal stimulus in developed economies, capital investment in artificial intelligence technologies and a more balanced regulatory regime in the U.S. to drive M&A activity this year.

"While it is difficult to predict the broader economic effects of the military action by the U.S. and Israel against Iran, we still see the potential for a more constructive operating environment," Solomon wrote in Goldman Sachs' annual letter to shareholders.

Bankers have said that faster deal closings under the Trump administration have assuaged worries that many investors and boardrooms had when there was greater scrutiny under the Biden administration.

Solomon said CEOs and boards are taking a much more front-footed approach on strategic transactions as a result.

"We expect this upswing to continue though a protracted war or another exogenous event could, of course, change the current sentiment," Solomon, one of Wall Street's most influential voices, said.

Top dealmakers who gathered at Tulane University's Corporate Law Institute conference in New Orleans this week echoed the view, saying that corporate confidence remains high despite geopolitical tensions and oil price spikes.

Roughly $1.1 trillion in deals has been announced this year, up 23% from the same period last year, according to data compiled by Dealogic.

PRIVATE CREDIT JITTERS REMAIN

Despite the optimism, Solomon cautioned that prudent risk management remains essential given heightened market volatility across risk assets and geopolitical uncertainty.

A constant stream of negative headlines following high-profile bankruptcies in recent months has drawn intense scrutiny to the roughly $2 trillion private credit market.

"We know from history that nothing is linear over time. While we remain optimistic about the operating environment, it is not hard to come up with scenarios where risks become a lot more pronounced," Solomon said, referring to the anxiety around private credit.

Concerns around private credit "are a reminder that the credit cycle has not been repealed," he said.

Investors have been worried about lending standards and the industry's exposure to software companies that could be disrupted by AI, triggering a wave of redemption requests at some private credit funds.

'U.S.-CHINA RESET NEEDED'

Solomon also called for a long-term reset in the U.S.-China relationship. The world’s two biggest economies have been working towards easing tensions after a period of heated rhetoric.

U.S. President Donald Trump earlier this week delayed his highly anticipated trip to Beijing to meet with Chinese President Xi Jinping as the ‌war with Iran drags on.

"Given how entwined they are, it is important that the U.S. and China reach a new modus vivendi, not just for the next 12 months, but rather for the next 10 to 20 years," Solomon said.

"We believe there is a roadmap for more meaningful dialogue. That said, it remains to be seen whether that dialogue will lead to a significant agreement."

Goldman in January reported fourth-quarter profit that beat Wall Street expectations, driven by a surge in dealmaking and trading.

(Reporting by Arasu Kannagi Basil in Bengaluru; Editing by Sahal Muhammed)

((ArasuKannagi.Basil@thomsonreuters.com;))