Despite few signs of de-escalation in the Iran conflict, Wall Street strategists are encouraging investors to begin buying stocks again.
A pullback in the S&P 500 and Nasdaq 100 indices this month has dampened investor sentiment. Escalating tensions in the Middle East have pushed oil prices higher and intensified inflation concerns. Nevertheless, equity strategists from Barclays, CIBC Capital Markets, and Truist Advisory Services Inc. advise clients to look past short-term risks, citing attractive valuations, robust earnings expectations, optimism about artificial intelligence technology, and the historical tendency of markets to rebound after geopolitical shocks.
These views provide some confidence to traders monitoring market movements. The S&P 500 is heading for its fifth consecutive weekly decline, having fallen nearly 6% since the outbreak of the Iran conflict. Market sentiment indicators, often viewed as contrarian signals, are hovering near pessimistic levels. Meanwhile, the index's forward 12-month price-to-earnings ratio stands at 19.5, roughly in line with its average over the past decade.
Christopher Harvey, Head of Equity and Portfolio Strategy at CIBC Capital Markets, wrote in a research report on Thursday, "Broadly speaking, the equity market is better suited for 'a steady jog rather than a sprint,' but the starting gun has been fired."
Bearish sentiment dominated on Thursday, with the S&P 500 falling 1.7% to 6,477.16, marking its largest single-day drop since January. Amid skepticism about a near-term ceasefire between the U.S. and Iran, the CBOE Volatility Index rose above 27, while a gauge of expected volatility for the Nasdaq 100 hovered around 30.
This sell-off has left the S&P 500 nearly 1,000 points below Harvey's year-end target of 7,450. If the strategist's assessment is correct and major war-related risks do not materialize, this implies potential upside of approximately 15% for the market. While acknowledging uncertainties related to Iran, Harvey recommends investors "begin to put capital to work in a slow and methodical manner," naming tech stocks such as Alphabet Inc., Apple, Nvidia, and Palantir Technologies Inc. as favorable.
Bullish signals are not limited to Harvey. JPMorgan's trading desk shifted its view on U.S. equities from "tactically bearish" to "neutral" on Wednesday. Andrew Tyler, the bank's Global Head of Market Intelligence, stated he is compiling a "shopping list," with his team currently bullish on energy stocks and large-cap tech stocks.
At Truist Advisory Services Inc., Keith Lerner advises clients to use the pullback as an opportunity to buy large-cap stocks on dips, while retaining some cash in case geopolitical tensions further weigh on the market.
Lerner, the firm's Chief Investment Officer and Chief Market Strategist, said, "If you have cash, you don't necessarily need to wait for the so-called 'perfect moment,' because opportunities can arise from sudden news, and you may not have time to react. If the market experiences a true panic sell-off, it could instead present an opportunity for more aggressive positioning."
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