The global economy is \u201cbending, not breaking\u201d as the war in Iran nears its fourth month, though growth risks haven\u2019t disappeared entirely, according to Goldman Sachs chief economist Jan Hatzius.<\/p>\n
\u201cIf we wrote down the most frequent topics in discussions with market participants, the vast majority would be negative,\u201d Hatzius wrote in a client note on Monday. \u201cMoreover, equities are far from cheap. So why have they performed so well?\u201d<\/p>\n
Hatzius cited three reasons why the months-long closure of the Strait of Hormuz hasn\u2019t yet derailed the economy and, by extension, markets:<\/p>\n
Oil hasn\u2019t rallied as much as expected, with the global market supported by unusually high inventories heading into the war.<\/p>\n
Regional shortages of products such as jet fuel have been met with \u201crelatively painless\u201d forms of demand destruction, such as reduced schedules on less valuable and less critical flight routes.<\/p>\n
The artificial intelligence boom and supportive fiscal policy have helped the stock market largely maintain its rally, even after a slower start to the year.<\/p>\n
But that doesn\u2019t mean the market isn\u2019t facing any risk, Hatzius said.<\/p>\n
Goldman Sachs\u2019s 12-month recession outlook still remains 5% above prewar levels, and the bank\u2019s economists see a slowdown in consumer spending on the horizon as tax refund cash flow runs dry, gas prices continue to rise, and wage growth slows.<\/p>\n
At the same time, the likelihood of a US recession in the next 12 months has fallen from 30% to 25%, according to Goldman Sachs research. While first quarter headline GDP growth was below expectations, private domestic sales have remained strong, and April saw 115,000 jobs created<\/a> and a drop in initial jobless claims.<\/p>\n A strong earnings season has also helped propel the S&P 500 (^GSPC<\/a>) and the Nasdaq Composite (^IXIC<\/a>) indexes to repeated all-time highs, with long-term profit expectations on the back of the AI productivity boom keeping investors bullish.<\/p>\n