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

Reuters reports that a trading team from Wall Street financial giant Goldman Sachs warns that the U.S. stock market may need to undergo further pullbacks before a new sustained rally can begin. 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 repeated fluctuations in global capital flows. After the recent failure of the S&P 500 to break through the 7,000 mark, the index 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 to clients: “From here, the only way forward is a downward adjustment first, then a buildup for a rally.” Although the macro environment provides some support overall, it is hardly enough to help the stock market digest the latest geopolitical tensions and volatile commodity prices, forming what traders call a “painful” short-term 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 conflicts on financial markets, which have already triggered a rapid surge in Brent crude oil prices—the international benchmark. Due to near-stagnation in oil and LNG shipping through the Strait of Hormuz and a major refinery in Saudi Arabia experiencing operational disruptions, energy markets faced severe supply shocks, pushing oil prices higher. Brent crude futures rose about 6.7%, nearing $78 per barrel, the largest single-day gain since June last year.

Following President Trump’s strong statement that military action against Iran will not end until objectives are achieved and may last for weeks, and as conflict spreads beyond Iran and Israel to other Middle Eastern economies—such as Iran launching drone and missile attacks on U.S. military infrastructure in Dubai, Abu Dhabi, Bahrain, and Kuwait, and Lebanon initiating a new round of rocket attacks on Israel—ongoing unpredictable geopolitical turmoil and the ripple effects of rising oil prices have given fund managers new reasons to sell risk assets like stocks and seek traditional safe havens such as gold and the U.S. dollar, as well as commodities like 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, further strengthening demand for traditional safe-haven assets like 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, question later”), with capital flowing quickly and massively from stocks into U.S. Treasuries, gold, safe currencies, and commodities like oil and natural gas that benefit from Middle East geopolitical risks.

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 a meaningful break above 7,000 points to start a new bull market.” After the recent failed attempt to break 7,000, the “Anthropic storm” that heavily impacted software stocks continues to ferment in global markets—fearful sell-offs driven by AI disruption fears, combined with repeated capital flows and geopolitical risks, make the S&P 500 more prone to a “painful” short-term path.

Meanwhile, although rising oil prices may disturb risk appetite, historical data shows that U.S. stocks tend to deliver positive returns about a month after an initial sell-off 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 of 7,000 points. Moreover, what truly determines whether U.S. stocks can sustain a strong bull after a correction is not the headlines of conflicts themselves but 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 indicates that oil price surges caused by geopolitical shocks have not historically blocked bull markets.

Despite the unsettling rise in oil prices, historical evidence suggests that the overall market cap damage may be limited. Goldman Sachs traders note that since 2000, in 22 instances when WTI crude oil prices surged 10% or more in a single day, the S&P 500’s subsequent returns after initial declines have often been positive.

According to Goldman’s statistics, “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 Goldman trader Dom Wilson 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 materially harm global economic growth and the bull market trajectory.

Another major Wall Street firm, Morgan Stanley, also reports that although 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 U.S. equity strategist Mike Wilson states that historical data shows that geopolitical risk-driven oil price spikes typically do not lead to prolonged stock market volatility; the S&P 500 has gained an average of about 2%, 6%, and 8% one, six, and twelve months after a geopolitical event.

Wilson further notes that unless international oil prices increase by 75% to 100% year-over-year and remain high, the U.S. bull market remains very resilient. He maintains a year-end target of 7,800 for the S&P 500 and prefers defensive sectors like healthcare. Similar to Goldman Sachs, Morgan Stanley believes that before a more robust bull market trajectory can be realized, the market may experience significant downward adjustments due to geopolitical turmoil, tariff storms, and pessimistic market sentiment driven by “AI disruption”—a negative combination of events.

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

He states that current market conditions do not meet these “high-risk” criteria. He believes we are in an “early cycle environment,” with earnings recovery accelerating, and describes “multiple synergistic factors” supporting a rolling recovery in U.S. stocks. Morgan Stanley projects 2026 as a “broad-based stock market bull under a rolling recovery,” emphasizing a return to risk appetite driven by sectoral cycles, with cyclicals leading the second phase of the bull market.

March’s Seasonal Weakness

However, according to Goldman traders, March’s seasonal performance in global equities has been mixed. 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 following two weeks averaging an 80 basis point gain.

Meanwhile, senior Standard Chartered analyst Steve Brice notes that markets are relatively well absorbing the unprecedented geopolitical shocks from Middle East tensions, with current declines around 2%. His core investment logic remains to buy on dips during clear corrections. Acknowledging rising uncertainty, he suggests U.S. stocks could fall 5% to 10%, creating buying opportunities.

Brice emphasizes that markets entered this panic with strong fundamentals. “We are 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 backdrop. Brice states that investors are currently assessing potential drawdowns under different scenarios. “This is exactly what markets are trying to figure out—how much stocks could fall in baseline and tail-risk scenarios, and how to position accordingly.”

Other key points from Goldman Sachs’ latest research include:

Since the beginning of this year, amid volatile conditions in early 2026 compared to 2025, retail investors who have been consistently buying U.S. stocks on dips have shown diminished enthusiasm.

Corporate buybacks may have provided some support, with last week’s buyback volume roughly 1.7 times the average for 2025 and 1.5 times that of 2024. But this support is expected to fade. The next blackout 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 buyback plans so far this year, the second most active start on record, after 2023. However, Goldman warns that buybacks alone are unlikely to ignite a rally, and once this support wanes, market weakness could be amplified.

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

Goldman’s models show that systematic funds (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 traders note, March has historically been the fourth-worst month for the S&P 500 since 1928, with especially volatile first halves; meanwhile, although recent buybacks have provided support, the upcoming blackout period around March 16 will reduce a key source of buying. Additionally, retail enthusiasm for buying on dips is weaker than in 2025. Therefore, in the context of Middle East geopolitical turmoil, a more prudent path involves a correction to release crowded positions and fragile sentiment, then seeking a breakout. For example, JPMorgan suggests a 1-2 week risk asset pullback followed by a significant “buy-the-dip” opportunity.