* Goldman Sachs ( GS ) expects favorable policies to prop up M&A

* But private credit jitters call for prudent risk

management, CEO Solomon says

* CEO says U.S.-China relationship reset needed

(Adds background and details from shareholder letter in

paragraphs 7-8, 13-18)

By Arasu Kannagi Basil

March 20 (Reuters) - Goldman Sachs ( GS ) expects

mergers and acquisitions activity to accelerate in 2026 despite

the disruption caused by the U.S.-Israeli war on Iran, CEO David

Solomon said on Friday.

The Wall Street giant's chief executive said the investment

bank expects monetary easing, fiscal stimulus in developed

economies, capital investment in artificial intelligence

technologies and a more balanced regulatory regime in the U.S.

to drive M&A activity this year.

"While it is difficult to predict the broader economic

effects of the military action by the U.S. and Israel against

Iran, we still see the potential for a more constructive

operating environment," Solomon wrote in Goldman Sachs' ( GS ) annual

letter to shareholders.

Bankers have said that faster deal closings under the Trump

administration have assuaged worries that many investors and

boardrooms had when there was greater scrutiny under the Biden

administration.

Solomon said CEOs and boards are taking a much more

front-footed approach on strategic transactions as a result.

"We expect this upswing to continue though a protracted war

or another exogenous event could, of course, change the current

sentiment," Solomon, one of Wall Street's most influential

voices, said.

Top dealmakers who gathered at Tulane University's Corporate

Law Institute conference in New Orleans this week echoed the

view, saying that corporate confidence remains high despite

geopolitical tensions and oil price spikes.

Roughly $1.1 trillion in deals has been announced this year,

up 23% from the same period last year, according to data

compiled by Dealogic.

PRIVATE CREDIT JITTERS REMAIN

Despite the optimism, Solomon cautioned that prudent risk

management remains essential given heightened market volatility

across risk assets and geopolitical uncertainty.

A constant stream of negative headlines following

high-profile bankruptcies in recent months has drawn intense

scrutiny to the roughly $2 trillion private credit market.

"We know from history that nothing is linear over time.

While we remain optimistic about the operating environment, it

is not hard to come up with scenarios where risks become a lot

more pronounced," Solomon said, referring to the anxiety around

private credit.

Concerns around private credit "are a reminder that the

credit cycle has not been repealed," he said.

Investors have been worried about lending standards and the

industry's exposure to software companies that could be

disrupted by AI, triggering a wave of redemption requests at

some private credit funds.

'U.S.-CHINA RESET NEEDED'

Solomon also called for a long-term reset in the U.S.-China

relationship. The world's two biggest economies have been

working towards easing tensions after a period of heated

rhetoric.

U.S. President Donald Trump earlier this week delayed his

highly anticipated trip to Beijing to meet with Chinese

President Xi Jinping as the ‌war with Iran drags on.

"Given how entwined they are, it is important that the U.S.

and China reach a new modus vivendi, not just for the next 12

months, but rather for the next 10 to 20 years," Solomon said.

"We believe there is a roadmap for more meaningful dialogue.

That said, it remains to be seen whether that dialogue will lead

to a significant agreement."

Goldman in January reported fourth-quarter profit that beat

Wall Street expectations, driven by a surge in dealmaking and

trading.