(Fox Business) - 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.
But in a Thursday analyst note, the Goldman strategists led by Dominic Wilson and Vickie Chang said the recent trends indicate the market is not braced for the war to worsen, with the fallout potentially rippling throughout the global economy.
"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."
The analysts said that because of easing concerns among investors, assets could prove even more vulnerable if Ukraine and Russia are unable to find a peaceful resolution to the worsening conflict humanitarian crisis.
"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 (from 4,504 to 4,059).
Economists at Goldman already trimmed their forecast for economic growth this year to 1.75% from 2.0% and noted that such an outlook means there is a "higher risk" of about 20% to 35% that the U.S. enters a recession over the next year.
"While our baseline forecast assumes that further service sector reopening and spending from excess savings will keep real GDP growth positive in the coming quarters, uncertainty around the outlook is higher than normal," a different analyst note said. "We view the risks of a recession as broadly in line with the 20-35% odds currently implied by models based on the slope of the yield curve."
By Megan Henney
