Global markets may be underestimating the downside risks posed to stocks by the ongoing war between Russia and Ukraine, according to Goldman Sachs strategists.
Although the Russian invasion of Ukraine in late February initially triggered a sharp market correction, many major stock indexes have since rebounded: The S&P 500, Nasdaq Composite and Dow Jones Industrial Average have all erased their initial losses and eclipsed levels recorded before the conflict began, and similar trends have been recorded in Europe.
"Our downside case is no longer well reflected in many areas and it is now easier to identify potential hedges than it has been for several weeks," the strategists wrote. "This points to a significant relaxation in the market’s assessment of the global implications of the Ukraine invasion." "While many assets could shift further to our upside case, they are now more vulnerable if progress toward a resolution proves fleeting or if energy supplies are disrupted more severely," they wrote.
Under Goldman's downside scenario, a severe disruption in gas flowing from Russia could trim 2.5 percentage points from European economic output and 0.25 points from the U.S. gross domestic product this year. And if the war continues to deteriorate, it could shave about 10% from the S&P 500's level on Tuesday afternoon .
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