Global financial markets have reacted with what Goldman Sachs Chairman and CEO David Solomon described as a surprisingly “benign” response to the escalating war with Iran, even as oil prices remain volatile and bond markets flash warning signs about inflation.
Speaking at the Australian Financial Review Business Summit on Tuesday, the Goldman Sachs chief said he expected a sharper market correction given the scale of the geopolitical shock.
“I’m actually surprised,” Solomon said. “I think the market reaction has been more benign, given the magnitude of this, than you might think.”
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The conflict, now in its fifth day, has sharpened investor focus on energy supply risks after Iran declared the Strait of Hormuz closed and warned that vessels passing through would be targeted. The narrow waterway is one of the world’s most critical oil chokepoints, handling a significant share of global crude exports from the Gulf.
Equities slip, but no rout
U.S. equities have turned volatile but have not experienced panic-driven selling. On Tuesday, the Dow Jones Industrial Average fell 0.83%, the S&P 500 declined 0.94%, and the Nasdaq Composite dropped 1.02%. Futures pointed lower again on Wednesday.
The pullback suggests investors are repricing risk rather than fleeing wholesale from equities. Market participants appear to be weighing two competing forces: the potential for a sustained energy shock that could drive inflation higher, and the possibility that the confrontation may be contained or short-lived.
Solomon said markets will need time to assess the broader economic consequences.
“I think it’s going to take a couple of weeks for markets to really digest the implications of what’s happened both in the short term or in the medium term,” he said.
Bond markets break from safe-haven script
Perhaps more striking than the equity moves has been the behavior of U.S. Treasuries. Yields have been rising, even as geopolitical tensions intensify. Historically, war or severe geopolitical disruptions push investors toward government bonds, lifting prices and lowering yields.
This time, bond prices have fallen, and yields have climbed.
The shift points to inflation anxiety rather than pure risk aversion. Investors are increasingly concerned that higher oil prices could feed into broader consumer prices, complicating the outlook for monetary policy and keeping interest rates elevated for longer.
The reaction points to a recalibration of inflation expectations rather than a rush for safety. In essence, investors appear to be demanding a higher risk premium across asset classes.
“The one thing that happens for sure whenever you have an event like this is people want a higher risk premium for any kind of risk asset they’re in, and so people start repricing things at the margin. And certainly we’re seeing that,” Solomon said.
Oil stabilizes after White House intervention
Oil markets have been at the center of investor concern. International benchmark Brent crude for May delivery rose 2.7% to $83.58 per barrel on Wednesday, while U.S. West Texas Intermediate futures for April climbed 2.3% to $76.26.
Prices had surged earlier in the week after Iran’s threat to maritime traffic through the Strait of Hormuz. However, they steadied toward the end of Tuesday’s session after U.S. President Donald Trump said the United States would provide insurance to tankers operating in the Persian Gulf to help restore maritime flows.
Trump acknowledged the risk of elevated energy costs, saying the war may result in “high oil prices for a little while,” but added that he expected prices to fall once the conflict subsides.
Energy strategists have warned that if the Strait of Hormuz were shut for a prolonged period, oil prices could surge above $100 per barrel. Such a move would significantly raise global inflation risks, particularly for energy-importing economies in Europe and parts of Asia.
Key variables: duration and transmission
For financial markets, the decisive factors will be duration and transmission.
Solomon outlined several open questions: “Does this become a more prolonged thing? Does it start to filter through to energy supply chains? Does it have other impacts that affect consumer sentiments [and] consumer behaviors in different parts of the world?”
If energy flows remain intact and price spikes prove temporary, markets may absorb the shock with limited long-term damage. But a sustained disruption could alter inflation trajectories, corporate earnings forecasts, and central bank policy paths.
A prolonged supply shock would likely lift transport and manufacturing costs, squeeze household purchasing power, and weigh on consumer confidence. In that scenario, equity valuations — particularly in rate-sensitive growth sectors — could come under greater pressure, while bond yields might remain elevated on inflation concerns.
At the same time, energy producers and defense stocks could benefit from higher commodity prices and increased geopolitical risk premia.
Repricing, not panic — for now
The broader market tone suggests recalibration rather than capitulation. Investors are demanding compensation for uncertainty but are not yet pricing in a worst-case energy shock.
The absence of a sharp flight to safety indicates that many participants are betting on containment, diplomatic de-escalation, or at least limited disruption to oil shipments.
Still, as Solomon indicated, markets lack sufficient data to assess the medium-term economic impact. In previous geopolitical crises, initial calm has sometimes given way to sharper adjustments once economic data begin to reflect higher costs and slower activity.