Stock market correction not over yet? Goldman Sachs CEO warns market has not truly priced in "cost of war"

David Solomon, chairman and CEO of Wall Street financial giant Goldman Sachs, expressed surprise at the "mild" global financial market reaction to the escalation of Middle East geopolitical conflicts. He added that it would take several weeks to have a better understanding of the ongoing standoff between the US and Iran in the Middle East, and therefore the market also needed more than a week to digest all the negative impact. "There are too many unknown factors at the moment, so it is very difficult to make accurate predictions," Solomon said at the Australian Financial Review Business Summit in Sydney on Wednesday. He added that investors were considering whether this event would evolve into a more lasting geopolitical situation and begin to affect consumer spending expectations and market inflation expectations. The assurance given by the US government to ensure the safe passage of ships through the Strait of Hormuz helped stabilize the tense situation in the market. However, despite this, the military conflict between the US/Israel and Iran has caused ripples throughout the entire Middle East region. The latest developments show that Israel has launched a new round of widespread airstrikes against Tehran, while Iran continues to launch missile counterattacks against Israel and US military bases in the Middle East. Iranian forces have fired several missiles at US military bases in Qatar, Bahrain, and Oman, and the Qataris have stated that the targets are not limited to military interests but also include some energy infrastructure. "I was actually surprised by the recent market reaction," Solomon said. "The market reaction has been relatively mild." He cited the latest closing data, stating that the S&P 500 index in the US stock market fell by less than 1% on Monday and Tuesday. Given the background of the latest geopolitical conflict, this pullback is quite mild. Meanwhile, due to concerns about rising oil prices resulting from the war, which could lead to a renewed rise in global inflation and a tightening monetary cycle, traders are significantly lowering their expectations of a Fed rate cut. This was the core logic behind the massive sell-off in US stocks on Tuesday. In the short term, a pullback is inevitable, and the market needs several weeks to digest the geopolitical conflict. Solomon said that traders weren't surprised by the rise in risk asset sales, the surge in the VIX index, and other volatility indicators that arose from the worsening geopolitical situation. "It will take several weeks for the market to really digest these impacts, not just a few days," he said. Market reactions are primarily focused on concerns about oil prices and inflation, as well as whether crude oil and liquefied natural gas (LNG) can pass through the Strait of Hormuz without obstacles in the coming days. The international crude oil benchmark, Brent crude oil prices, broke through $82 per barrel on Wednesday, with a cumulative increase of about 12% over the past two days, marking the largest two-day gain since 2020. Mohammad Akbarzadeh, deputy commander of the Iranian Islamic Revolutionary Guard Navy, said that the Strait of Hormuz was completely under the control of the Iranian Navy, with over ten oil tankers hit by shellfire in the strait. Akbarzadeh emphasized that the Revolutionary Guard Navy had repeatedly warned that the Strait of Hormuz was in a state of war, and any ships could be hit by shells or drones. Solomon's latest views are similar to the predictions of Wall Street financial giants Morgan Stanley and Goldman Sachs trading teams. They believe that US and global stock markets may need further corrections before initiating a sustained upward trend. Similarly to Goldman Sachs, Morgan Stanley also believes that US stocks may experience a significant downward adjustment due to a combination of geopolitical turmoil, tariff storms, and pessimistic market themes such as "AI disrupting everything," before achieving a stronger bull market trajectory. As US President Trump announced a military operation against Iran with the statement of "no stopping until the goal is achieved," which could last for four weeks, and with the conflict spreading beyond Iran and Israel to other Middle Eastern economies - such as Iran launching drone and missile attacks on US military critical infrastructure in Dubai, Abu Dhabi, Bahrain, and Kuwait, Lebanon launching a new round of rocket attacks on Israel, the continuous unpredictable geopolitical turmoil in the Middle East, and potential ripple effects of rising oil prices, fund managers have new reasons to sell off stocks and other risk assets on a large scale, turning to traditional safe-haven assets such as gold, the US dollar, and oil, which will benefit significantly in the short term due to Middle East geopolitical tensions. The Goldman Sachs trading team led by Gail Hafif and Brian Garrett wrote in a research report sent to clients, "From here, the only way up is to first adjust downward and then build momentum upward." While the macro background at large does provide some support, this hardly helps the stock market to digest the latest geopolitical tensions and significant commodity price fluctuations, forming what the institution's traders referred to as a "painful" correction path in the short term. Senior analyst Steve Brice from Standard Chartered Bank stated that the market was relatively well digesting the unprecedented geopolitical shocks from the Middle East tensions, with stock market losses currently around 2%, and the core investment logic is still to buy on the dips. Brice acknowledged that uncertainties were rising, and suggested that the US stock market may fall by 5% to 10%, presenting a buying opportunity. Solomon also addressed the turmoil in the $1.8 trillion private credit market. He stated that despite "limited" instances of individual credit problems, this did not mean that investors should be overly concerned about overall credit quality. "If you really look at the underlying credit assets in these portfolios, so far you haven't seen a widespread deterioration trend," he said. In a recent interview, he also stated that the US economy was still robust, making it difficult to identify which areas might have excessively high credit risks. Solomon remains optimistic because he believes that what is currently being seen are more "individual problems" rather than a general deterioration in credit fundamentals across the private credit industry. He explained that although market sentiment had deteriorated, the real economy and cash flow of most borrowers had not collapsed synchronously. "When we really enter a super credit cycle, or we really experience an actual slowdown, or we really face a massive recession, you will see more clearly where the problems lie in those areas where lending standards have significantly weakened," he said. The US private credit market has recently been rife with negative news. In recent weeks, the market has seen restrictions and asset disposals in the retail credit funds under Blue Owl, concerns about valuation transparency and liquidity pressure in the industry rising, as well as a growing panic surrounding how AI could impact the software industry's balance sheets, leading to a drag on related private credit assets' quality. Looking at the data, Fitch revealed at the end of February that the default rate for US private credit had risen to 5.8% in January 2026, and Morningstar DBRS had also maintained a negative outlook for the industry. In other words, the recent stream of bad news in the private credit market is mainly related to pressure on liquidity, valuation, and exposures in certain industries simultaneously.