The global economy is “bending, not breaking” as the war in Iran nears its fourth month, though growth risks haven’t disappeared entirely, according to Goldman Sachs chief economist Jan Hatzius.

“If we wrote down the most frequent topics in discussions with market participants, the vast majority would be negative,” Hatzius wrote in a client note on Monday. “Moreover, equities are far from cheap. So why have they performed so well?”

Hatzius cited three reasons why the months-long closure of the Strait of Hormuz hasn’t yet derailed the economy and, by extension, markets:

1. Oil hasn’t rallied as much as expected, with the global market supported by unusually high inventories heading into the war.

2. Regional shortages of products such as jet fuel have been met with “relatively painless” forms of demand destruction, such as reduced schedules on less valuable and less critical flight routes.

3. The artificial intelligence boom and supportive fiscal policy have helped the stock market largely maintain its rally, even after a slower start to the year.

But that doesn’t mean the market isn’t facing any risk, Hatzius said.

Goldman Sachs’s 12-month recession outlook still remains 5% above prewar levels, and the bank’s economists see a slowdown in consumer spending on the horizon as tax refund cash flow runs dry, gas prices continue to rise, and wage growth slows.

At the same time, the likelihood of a US recession in the next 12 months has fallen from 30% to 25%, according to Goldman Sachs research. While first quarter headline GDP growth was below expectations, private domestic sales have remained strong, and April saw 115,000 jobs created and a drop in initial jobless claims.

A strong earnings season has also helped propel the S&P 500 (^GSPC) and the Nasdaq Composite (^IXIC) indexes to repeated all-time highs, with long-term profit expectations on the back of the AI productivity boom keeping investors bullish.

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While the AI boom will almost certainly make companies more efficient, every step-up in productivity “means fewer new jobs for any given GDP increase,” Hatzius said. Some of the second-order effects of AI, such as higher electronics prices and expanded software features, are likely to put upward pressure on already sticky inflation.

The result is a complicated picture for investors, where the “baseline is positive but the risks are so asymmetrically negative,” skewing toward more adverse outcomes such as higher oil prices and widening economic damage, Hatzius wrote.