Gold prices have plunged nearly 18% since late February, defying their usual role as a safe harbor during crises. At the same time, the S&P 500 has held up far better, dropping less than 4%. Morgan Stanley says this split tells a surprising story about where investors are placing their bets.
Gold’s Unexpected Drop Amid Geopolitical Tensions
Since the Iran conflict kicked off on February 28, gold hasn’t behaved like the go-to shelter it’s long been known for. Instead, its price has slid sharply, entering bear market territory with a decline exceeding 20% from its January peak. Meanwhile, the S&P 500 has been relatively resilient, dipping by under 4% during the same stretch.
Morgan Stanley’s Chief Equity Strategist Mike Wilson has noticed this divergence. He points to a key indicator—the S&P 500-to-gold ratio—that’s surged nearly 12% since the war began. Simply put, this ratio compares the value of the stock market to the price of gold. When it climbs, it suggests investors are moving money into equities rather than fleeing to precious metals.
What the S&P 500-to-Gold Ratio Signals
Traditionally, gold’s price often rises amid uncertainty, offering a protective cushion when stocks falter. But the current ratio spike implies the opposite: market participants are betting on U.S. Equities to outperform despite ongoing geopolitical risks. Wilson believes this shows momentum is on the U.S. side. In the conflict, and by extension, the economy and corporate earnings remain sturdy.
In his recent note, Wilson described this shift as “one of the more constructive recent market developments,” emphasizing that the move in the ratio triggered buy signals based on technical analysis. Even with the uncertainty of war, investors seem to believe the U.S. economy will stay strong during and after the conflict.
Adding to that, Morgan Stanley suggests some governments could be selling gold reserves to pay for rising war-related costs like higher oil prices. That could be another factor pressuring gold downward.
Stock Market Volatility and Sector Rotation
The stock market has been anything but calm lately, with a sharp, broad-based sell-off hitting sectors associated with artificial intelligence and enterprise software especially hard.
Morgan Stanley strategist Katie Huberty says investors are selling AI-related stocks broadly without picking winners or losers.
Big names like Atlassian, Workday, Palantir, Salesforce, and ServiceNow have each dropped between 16% and 37% in recent weeks. Yet, Huberty argues that the AI trade isn’t over—it’s evolving. The market is shifting from focusing solely on AI builders like chipmakers to companies adopting AI in their operations.
Morgan Stanley’s data shows companies using AI are growing profits, though not as fast as big indexes like the S&P 500. But the market hasn’t rewarded them yet, hinting at a disconnect between fundamentals and price action.
Looking Ahead: Market Forecasts and Investor Strategy
Wall Street firms are setting varied year-end targets for the S&P 500 in 2026.
Morgan Stanley forecasts 7,800, slightly more optimistic than JPMorgan’s 7,500 and Bank of America’s more cautious 7,100. UBS and Barclays align closer to the 7,400-7,500 range, factoring in AI momentum and earnings strength.
While some analysts warn that the easy gains from early AI investments are fading, others see this as a rotation opportunity. Bank of America’s Michael Hartnett suggests investors should explore “unloved” areas like small caps, real estate investment trusts, and emerging markets where early rotation often happens.
The recent ratio surge and stock market resilience also challenge gloomy outlooks from other big players. BlackRock’s Larry Fink has flagged oil prices possibly topping $150 a barrel, raising recession concerns. Goldman Sachs bumped recession odds to 30%, citing energy costs and weaker jobs data. Still, Morgan Stanley remains optimistic that earnings and economic growth will hold up despite challenges.
Morgan Stanley sees the gold drop and stock market moves as a sign that investors are surprisingly confident in U.S. stocks despite geopolitical risks. We'll have to watch how this confidence plays out as the conflict continues and the market adapts to changes in AI.
