Morgan Stanley: Geopolitical risks are already fully priced in, US stocks are about to resume their upward trend!

At the start of this week, the global financial markets were once again shrouded in significant risk-off sentiment. However, unexpectedly, under the shadow of geopolitical conflicts, the traditional safe-haven asset gold failed to play its “safe harbor” role and instead suffered a fierce sell-off.

During early trading on Monday, Nymex gold futures prices plunged as much as 10%.

Analysts believe that the plunge in gold and silver prices was primarily driven by two factors: first, gold’s previous highs attracted a large number of retail speculators, with capital pouring crazily into ETFs, but recent volatile market conditions triggered a stampede liquidation of these leveraged funds.

Secondly, Morgan Stanley’s Chief U.S. Equity Strategist Mike Wilson offered another key perspective: some national governments may be reducing their gold reserves. This is mainly to cope with fiscal pressure caused by surging commodity prices, or to pay for massive energy subsidies.

Despite gold’s weak performance, Wilson believes this actually sends a positive signal to the stock market. His logic is based on a long-term observation: gold prices usually correlate positively with the market’s “anxiety index,” and the S&P 500/Gold Ratio is an excellent indicator of the market’s true health.

Even though the U.S. stock market recently retreated 6.8% from historical highs, this ratio has soared since gold’s drop was even sharper.

Wilson pointed out: “This indicator can more accurately reflect the market’s pricing of economic prospects and corporate earnings. It is highly correlated with consumer confidence, which explains why sometimes, even though stock markets are rising in nominal terms, the average investor’s sentiment can feel very different.”

In short, a higher S&P 500/Gold Ratio means investors are more optimistic about the stock market and less worried about inflation, deflation, or geopolitical crises. Conversely, if this ratio falls to an extremely low level, it indicates excessive pessimism in the market.

Wilson observed that since the conflict erupted three weeks ago, the ratio has surged by 12%. Based on Monday’s futures performance, this trend is likely to continue strengthening.

It is worth noting that this rebound immediately followed a significant decline in the ratio. Wilson believes this shows the market has already fully priced in geopolitical risks, rather than being blindly optimistic.

Historical data show that when the U.S. becomes more deeply involved in major conflicts, the S&P/Gold Ratio often bottoms out and then rebounds. Wilson finally asked, “Are we witnessing the same logic playing out again?” If these historical patterns hold, the ‘bear market’ in gold could mark the beginning of a new upward trend in equities.