As the oil shock fades, market volatility shifts from macro to micro divergences such as AI

Overview

The report is organized around the theme of “from macro to micro volatility”: as the Iran-related oil-price shock eases, the distribution of macro outcomes for oil prices, inflation, rates, and growth narrows, reducing traditional macro tail risks facing global markets. At the same time, however, AI-related equity valuations have already priced in more optimistic assumptions for productivity, capex, and earnings, and changes in expectations around semiconductors and the AI value chain may continue to drive higher micro volatility at the single-stock level.

Core views

The core views are as follows: First, lower oil-price risk reinforces cyclical resilience in the US, Europe, and oil-importing emerging markets, while supporting real income and the repair of consumer buffers. Second, after the Fed turned more hawkish at its June meeting, rate-hike risk has replaced high oil prices as the main macro concern, but this risk is already partly priced in by the rates market, and falling oil prices should help improve future inflation news. Third, equity markets have absorbed the rate shock in the short term, but valuations already reflect a lot of good news, and AI-related assets require more optimistic long-term return assumptions to justify current pricing. Fourth, the US dollar is supported by a hawkish Fed and capital attracted to US AI equities, but Asian currency management, emerging market performance, and carry returns may keep dollar performance differentiated. Fifth, within emerging markets, equities in oil-importing countries may benefit from lower oil prices, and some local rates also have room to fall, but the front end of MXN rates is more vulnerable to hawkish Fed repricing.

Analysis framework

The report uses a global multi-asset framework to analyze the linkages among oil prices, inflation, rates, growth, the US dollar, equity valuations, returns on AI capex, and emerging market assets. The authors first assess whether macro tail risks from the oil shock have declined, then evaluate how hawkish Fed risk and cyclical resilience affect equities, rates, FX, and emerging markets, and finally shift the source of market volatility from macro assets toward micro variables such as single-stock earnings, AI winners and losers, technological substitution, issuance, and investment plans.

Methodology notes

• Multi-asset strategyMacro-to-micro volatility framework

  Lower macro volatility, higher micro volatility

  As the oil shock fades, the range of macro volatility across oil prices, rates, growth, and FX may narrow; but disagreement within equities over AI investment returns, earnings durability, and technological substitution will raise single-stock volatility.

• Valuation and cycleTension between supportive fundamentals and elevated valuations

  The cyclical backdrop is positive, but valuations already reflect good news

  The report argues that risk assets benefit from resilient growth, lower oil prices, and easing inflation pressure, but cyclical stocks, AI-related equities, and global indices have already priced in fairly optimistic scenarios, raising the bar for upside surprises.

• Macro transmissionOil shock transmission framework

  Lower oil prices reduce tail risks to inflation and rates

  A weaker energy supply shock affects not only the distribution of crude and refined product prices, but also compresses the distribution of inflation and rate outcomes, thereby improving the macro backdrop for oil-importing economies and risk assets.

Asset mapping & comparison

Structured mapping from thesis to named assets (strengths, weaknesses, peers, risks).

• Brent crude and energy assets

  The oil shock was previously the main source of macro uncertainty, and the agreement plus restored transport have reduced upside tail risks.

  Strengths

  Lower supply-shock risk helps ease inflation pressure and improves real income and growth prospects for oil-importing economies.

  Weaknesses

  Oil contracts still retain some pre-war premium, and the pace of implementation of the agreement and supply recovery remains uncertain.

  Comparison

  Compared with equities and long-duration assets, oil prices and rates had previously reflected the shock more fully, so there is still risk premium that can be squeezed out.

  Risks

  If supply recovers too quickly, there could be short-term oversupply; if implementation of the agreement is obstructed, upside tail risks to oil prices could widen again.

• Global equities and cyclical stocks

  Lower oil prices, resilient growth, and easing inflation are supportive for equities.

  Strengths

  A favorable cyclical backdrop and a potential Goldilocks scenario are positive for risk assets.

  Weaknesses

  Equity valuations already price in a lot of good news, and cyclical stocks have already clearly outperformed defensive stocks.

  Comparison

  The equity market has absorbed the hawkish Fed shock better than expected, but its main pressure has shifted from rates to valuation and earnings delivery.

  Risks

  If the Fed brings forward hikes further, or if corporate earnings season fails to meet high expectations, equities could face a pullback.

• AI-related equities and semiconductors

  AI is the core source of micro volatility in the equity market and also the area where elevated valuations and optimistic earnings assumptions are most concentrated.

  Strengths

  As long as the AI investment boom remains intact, near-term earnings contributions may still outweigh valuation concerns.

  Weaknesses

  Current pricing requires more optimistic assumptions for productivity, capex, and the durability of long-term earnings.

  Comparison

  Compared with traditional macro assets, divergence in the AI chain is driven more by company-level winners and losers, technological substitution, and investment returns.

  Risks

  If expectations for semiconductor or AI capex returns are challenged, the market's tolerance for high valuations will decline quickly.

• US rates and duration

  Hawkish Fed risk has replaced high oil prices as the main macro concern, but the report sees opportunities to receive rates within elevated hike pricing.

  Strengths

  Lower oil prices help improve the inflation outlook, and duration becomes a better hedge against equity risk after supply-driven inflation risk declines.

  Weaknesses

  Sensitivity to short-term data is rising, and the lack of clear policy guidance may amplify localized rate volatility.

  Comparison

  The report believes the current distribution underestimates multiple paths to lower rates in 2027 and beyond.

  Risks

  If wage or inflation data run hot, pricing for July and September rate hikes may intensify further.

• US dollar and major FX

  A hawkish Fed, curve flattening, and capital inflows into US AI equities support the dollar, but USD strength is still expected to remain differentiated.

  Strengths

  The dollar is supported relative to low-yielding currencies and safe-haven assets such as gold and the Swiss franc.

  Weaknesses

  Asian currency management, gradual RMB appreciation, threats of yen intervention, and India's measures to attract capital inflows limit the upside of the dollar.

  Comparison

  The dollar is stronger relative to developed markets, but spillovers relative to emerging markets are more limited.

  Risks

  If the Fed path turns even more hawkish, carry trades may face short-term pressure; but the report does not see an imminent sharp breakout in FX volatility.

• Emerging market equities, rates, and FX carry

  Lower oil prices and resilient growth support emerging market assets, especially oil-importing countries and some local rates markets.

  Strengths

  Oil-importing laggard markets such as India, Turkey, and Egypt may catch up; opportunities exist in rates linked to HUF, COP, ZAR, BRL, and INR.

  Weaknesses

  Higher core rates and a stronger dollar had previously interrupted the easing rally in emerging market assets, leaving market performance more differentiated.

  Comparison

  The report views this as a broadening of returns rather than a rotation from North Asia AI/tech markets to other markets, with North Asia still leading on strong earnings support.

  Risks

  The front end of MXN rates is viewed as most vulnerable to hawkish Fed shocks because valuations are expensive and sensitivity to the US terminal rate is high.

• Gold and crypto assets

  A hawkish Fed and restored inflation credibility weaken the debasement trade logic.

  Strengths

  They may still retain safe-haven characteristics if macro uncertainty rises again.

  Weaknesses

  The report says debasement concerns have faded, and position unwinds have pushed gold and crypto prices lower.

  Comparison

  Compared with the dollar, safe-haven assets such as gold and the Swiss franc have come under pressure in this round of Fed repricing.

  Risks

  If policy credibility or inflation expectations deteriorate again, related safe-haven and debasement themes may reheat.

Key data

• Goldman Sachs commodities team's Q4 Brent oil price forecast$80/bblThe report says there are risks on both sides of this forecast because execution of the agreement and the recovery of supply remain uncertain.
• Recovery level of Persian Gulf crude oil exports66% of normal levelsThe relevant statistics include routes such as the Strait of Hormuz, Yanbu, Fujairah, the Gulf of Oman, and Botas Ceyhan.
• Assumed normal flow through the Strait of Hormuz20mb/dThe report uses this as the benchmark for normal flow in its chart notes.
• US federal funds rate range3.5%-4.5%The report says this range has been maintained for more than 18 months, and the market broadly expects it to remain there for at least the next year.
• US 12-month recession riskReduced to the long-term normGoldman Sachs' US team lowered this estimate against the backdrop of falling oil prices and resilient growth.
• Assessment of trend growthAround 2%The report believes growth may return to the roughly 2% range seen in recent years, thereby narrowing the distribution of macro outcomes.
• Fed risk monitoring windowThe next 2 to 3 monthsIf short-term wage and inflation data run hot, pricing for July and September rate hikes could strengthen; but falling oil prices may weaken the case for hikes afterward.

Impact & implications

For portfolios, the implication of the report is that lower macro tail risk supports continuing to hold risk exposure such as equity longs, European sovereign bond carry, and emerging market FX carry; but because valuations are high, AI earnings expectations are crowded, and single-stock volatility is rising, risk management should rely more on options protection, exposure limits, or outright long volatility allocations. Duration is also better suited as a hedge to equity risk after supply-driven inflation risk declines.

Risks

• If the Fed remains hawkish and near-term employment or inflation data run hot, pricing for July and September rate hikes could rise further.
• AI-related asset valuations are elevated; if earnings, capex, or productivity returns disappoint, micro volatility in equities may continue to increase.
• The market has already fully priced in favorable cyclical outcomes and AI gains, raising the bar for upside surprises in earnings season.
• There is still uncertainty around the implementation of the Iran-related agreement, the restoration of energy transport, and the rebound in supply, so oil-price tail risks have not fully disappeared.
• A renewed rise in the dollar and core rates could disrupt emerging market assets, especially the front end of MXN rates, which is sensitive to the US terminal rate.
• Lower implied correlation among single stocks but higher single-stock volatility means index-level calm may mask internal portfolio risk.

What to watch

• Progress in restoring energy transport through the Strait of Hormuz and the Persian Gulf, and whether Brent prices return near pre-war levels.
• The impact of US employment, wage, and inflation data on expectations for July and September rate hikes.
• Changes in 10-year breakeven inflation, the shape of the yield curve, and market risk premia.
• Earnings season for AI-related companies, capex plans, investment returns, and revisions to expectations across the semiconductor chain.
• Whether single-stock equity volatility, index implied correlation, and micro volatility continue to exceed volatility in macro assets.
• Divergent performance of the dollar against the euro, yen, Swiss franc, and emerging market currencies.
• Whether equities in oil-importing emerging markets such as India, Turkey, and Egypt see a broadening of returns.
• The sensitivity of local rates markets such as HUF, COP, ZAR, BRL, INR, and MXN to US rate repricing.