Traders at JPMorgan Chase have outlined three scenarios for the US stock market based on developments in the Middle East.
Starting with a “status quo” scenario, JPMorgan’s trading desk predicts that stocks would experience some stability in the short term if tensions de-escalate and restrictions remain in place in the Strait of Hormuz, according to Bloomberg.
“It would be a short-lived win if Trump were to back away from his threats on Iranian infra, seemingly keeping Iran from targeting Saudi oil production while keeping the Houthis from closing access to the Red Sea.”
In a bearish scenario, JPMorgan envisions diplomacy failure and increased military activity leading to a spike in West Texas Intermediate crude prices to between $125 and $150. In such a situation, the market could see a significant sell-off, with airlines particularly vulnerable, and energy, renewable energy, and defense sector firms likely to see decreased demand.
“In equities, all things energy would need to be bought.”
On the bullish side, traders foresee an “everything rally” if tensions ease or there is a shift in government policy. Small-cap stocks and technology shares are expected to lead the market, with homebuilders, retailers, and financials performing well. Precious metals could benefit from a weaker dollar, but energy stocks might face challenges.
Currently, the S&P 500 is trading at 6,616, with oil priced at $88.25 per barrel.
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