Goldman Sachs traders warn: Trump's "bluster" can't replace crude oil. If the Strait of Hormuz disruption continues, a second wave of inflation may be on the way.

The crisis in the Strait of Hormuz is pushing the market into a fundamental contradiction between rhetoric and reality. Senior traders at Goldman Sachs assert that words cannot replace physical molecules, and when verbal deterrence fails, the real stress test has only just begun.

Rich Privorotsky, head of Goldman Sachs’ One Delta business, pointed out in the latest client memo that despite the U.S. once again delaying the deadline for strikes on Iranian energy infrastructure, the oil market’s reaction remains muted, with market attention sharply narrowing to one question—when will the Strait of Hormuz reopen? He warned, “You cannot replace molecules with rhetoric.”

On the market impact front, Privorotsky believes that the inflation shock from the Hormuz disruption extends far beyond crude oil itself, spreading to diesel, petrochemicals, plastics, and even helium. The related price pressures will gradually transmit to broader economic levels in the coming months, constituting a potential second wave of inflation.

Meanwhile, he emphasized that the trajectory of interest rates remains the overriding core variable, with a breakthrough rise in real rates likely to pressure the stock market.

“The Molecule” Dilemma: Verbal Pressure is Losing Market Efficacy

Privorotsky characterizes the current situation as an expanding gap between fundamentals and narrative. He noted that the market’s reaction has weakened—the White House’s statements are still present, but their effectiveness is diminishing, and once this tool is completely ineffective, the market will face repricing.

In his view, the current fundamental scenario still points to further escalation, but he does not entirely rule out the possibility of a turning point, just that these turning points “are not obvious and will not be led by the U.S.”

The first round of negotiations appears to have failed even before the formal launch, leading the market into a wait-and-see mode, betting on whether some compromise can naturally emerge after the pressure builds.

Second Wave of Inflation: The Shock is Spreading Downstream

Privorotsky holds a bullish long-term view on oil prices, arguing that the option value of the Hormuz disruption has become a real and repeatable risk premium.

The depletion of the Strategic Petroleum Reserve (SPR) means that repurchases will be necessary at some point in the future, which further supports long-term crude oil prices. He believes it is reasonable to buy long-dated crude and leading energy stocks in any de-escalation scenario.

However, what is more concerning is the diffusion path of the inflation shock. He pointed out that if the disruption continues, price pressures will no longer be limited to crude oil but will fully permeate categories such as diesel, petrochemicals, plastics, and even helium, with second-order effects expanding and gradually reflecting in inflation data over the coming months.

Interest Rates are Core: Asset Logic in a Stagflation Scenario

Privorotsky clearly states that the importance of interest rate trends outweighs everything else. He warns that tightening at the end of the cycle is the worst environment for equity assets, with aggressive bear flattening combined with breakthroughs in real rates exerting continuous pressure on valuations—even if corporate profits barely hold, PE ratio compression is unavoidable.

In terms of asset allocation, he notes that in a stagflation shock scenario, governments may be forced to make trade-offs between defense spending and energy and food subsidies, and this fiscal constraint explains why the defense sector has underperformed expectations.

On gold, he believes that the current situation resembles an opportunity rather than a warning. Tightening at the end of the cycle combined with fiscal overspending on the other side can support both a strong dollar and rising gold prices.

Risks and Turning Points: If the Strait Reopens

Privorotsky admits that holding risk assets is unsettling at present. The 10-day pause in U.S. strikes on Iranian infrastructure has not eliminated the risk of renewed conflict over the weekend; although positions and sentiment provide some support for the stock market, with month-end fund demand also present, interest rates remain the decisive variable.

He outlines a critical reversal scenario: if the Strait of Hormuz reopens, the bear flattening will be lifted, real rates will fall, and energy and financial conditions will loosen simultaneously, granting the market a significant dual relief.

He concludes by stating: after sufficient pressure builds, compromise usually follows, and from a longer-cycle perspective, maintaining a constructive stance in such environments has historically been the right choice.

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