The market's immediate reaction to the Middle East conflict has been to price in higher inflation due to spiking energy costs. However, it has not yet priced in a significant economic growth shock. This second-order effect, the "shoe that's left to drop," represents a major future risk if the conflict persists.

Despite significant focus on AI and corporate earnings, the firm identifies oil prices and potential Middle East supply shocks as the single most critical variable for the market. This geopolitical risk is framed as an unusually wide range of outcomes that could effectively act as a tax on the entire economy.

A single major geopolitical event, like the discussed Iran conflict, can simultaneously and rapidly reverse numerous positive, interconnected economic indicators. This demonstrates the extreme fragility of prevailing market storylines, flipping everything from energy prices and equity performance to inflation and central bank policy.

The tech industry's heavy reliance on capital from Middle East sovereign wealth funds and family offices is an underappreciated risk. A prolonged conflict in the region could cause these LPs to pull back commitments, creating a significant, delayed-reaction liquidity crunch for the VC ecosystem and large, capital-intensive tech companies.

The team's central economic forecast hinges on the belief that President Trump's sensitivity to falling stock prices and rising gas prices will compel him to de-escalate the conflict with Iran within weeks, preventing a recession.

BMO views an AI-driven recession as a distant risk (2028+). More pressing concerns are a sudden oil price spike to $150/barrel, amplified by depleted reserves, or a wider Middle East conflict that forces inflationary, inefficient spending on war efforts.

Goldman Sachs projects 2.5% US growth, significantly above the market consensus of under 2%. This optimistic, contrarian view is based on factors the market may be underappreciating: the removal of tariff drags, ongoing fiscal support from tax cuts, and the delayed effects of easier financial conditions.

Historical precedent suggests that in a positive growth environment, a geopolitical shock like a potential US-Iran conflict might not lead to a sustained risk-off rally in the US dollar. Markets may price out the risk premium quickly, allowing pro-cyclical trends to resume, as seen in a similar event last year.

A senior market leader is most concerned about under-discussed risks. Specifically, a prolonged conflict in the Middle East and the unsustainable growth rate of US public debt, which could destabilize rate markets, are viewed as greater threats than popular topics like AI or private credit.