Bank of America Securities global economist Antonio Gabriel stated that investors may be underestimating the potential for the U.S.-Israel-Iran conflict to cause significant disruption to the global economy. While the prevailing market view is that the conflict's impact will be short-lived, the duration and scope of the war remain highly uncertain based on the current situation. In a report issued on Monday, Gabriel noted that while a swift end to the conflict is still possible, the possibility of the war extending into the second quarter cannot be ignored, and an even more prolonged conflict cannot be ruled out. "The market appears to be treating this event as a temporary shock, but we believe investors may be underestimating its potential risks."
From a market performance perspective, investor sentiment remains relatively calm. Gabriel pointed out that the S&P 500 is currently only about 4% below its all-time high, indicating that market concerns about the war have not escalated significantly. Meanwhile, as inflation worries intensify, traders have begun to scale back their expectations for the magnitude of Federal Reserve interest rate cuts this year. After oil prices retreated on Monday, some bargain-hunting emerged, pushing the S&P 500 index up by approximately 1%.
Gabriel believes that the market is currently more focused on the war's impact on inflation and is under-pricing the potential for more severe shocks to global economic growth. "In our assessment, the market is primarily focused on inflation issues and is not sufficiently considering more damaging scenarios for global economic growth."
As the trajectory of the war remains unclear, major Wall Street institutions are assessing the conflict's potential impact on equity markets. Currently, strategists at Goldman Sachs and Morgan Stanley remain relatively optimistic about U.S. stocks, believing that corporate earnings growth and moderated valuations can still provide support for the market. However, Stephen Parker, Co-Head of Global Investment Strategy at J.P. Morgan Private Bank, believes there is "a degree of complacency" in the market regarding war risks.
Simultaneously, Helima Croft, Head of Global Commodity Strategy at RBC Capital Markets, has raised her forecasts for the conflict's duration and its impact on oil prices. She stated that expanded U.S. military objectives and Iran's asymmetric warfare capabilities could prolong the conflict into the spring. Croft warned that if the war continues for the next three to four weeks without significant improvement in maritime transport security, international oil prices could exceed the 2022 peak of $128 per barrel seen during the Russia-Ukraine conflict. If the conflict persists for months, prices could even surpass the 2008 historical high of $146 per barrel.
During early trading on Monday, oil prices declined as hopes grew for the resumption of shipping through the Strait of Hormuz. West Texas Intermediate crude fell 3.6% to $95.14 per barrel, while the S&P 500 index rose 1.1%. However, due to the ongoing conflict, commercial shipping through the Strait of Hormuz remains suspended. The restoration of this critical global energy transport route remains a key focus for market participants.
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