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Middle East Conflict · Oil Prices · Recession Risk · Stock Market
The U.S. stock market is experiencing its worst quarter in nearly four years, with the S&P 500 erasing seven months of gains, as a Middle East war triggered a 55% surge in oil prices and upended Federal Reserve interest rate cut expectations.
Initial investor confidence for a "banner year" and a "broadening" rally, projecting double-digit returns, has been shattered. The tech-heavy Nasdaq composite and Dow Jones Industrial Average both entered correction territory in late March.
The conflict, which began on February 28 with U.S. and Israeli strikes on Iran, caused oil prices to surge 55%, gold to sink, and bond yields to climb sharply. This energy cost increase raised inflation prospects, reducing the odds of two Fed rate cuts by year-end from nearly 80% to less than 2%.
Michael Kantrowitz, chief investment strategist at Piper Sandler, noted the "perfect backdrop" for market broadening was paused. David Kelly, chief market strategist at J.P. Morgan Asset Management, warns a prolonged conflict means a global recession.
BlackRock CEO Larry Fink fears years of oil prices above $100 a barrel if Iran remains a threat. Bond portfolios offered little relief, with Treasurys experiencing their worst rout since last April, causing a traditional 60% stocks and 40% bonds portfolio to perform almost as poorly as holding stocks alone.
Despite mounting pressures, analysts project a sixth-straight quarter of double-digit earnings growth for S&P 500 companies, according to FactSet. The S&P 500 energy sector is up 39% this year, on track for its best quarterly performance on record.
Steven Blitz, chief economist at TS Lombard, highlights the "energy tax" on an already "wobbly" U.S. economy. Many analysts maintain modest stock-market gain targets, contingent on a short-lived Middle East conflict, with Kantrowitz stating, "If oil doesn’t go down, the market won’t go up—period."
War Halts Rally, Stocks Face Worst Quarter(current)
