Global equity investors, who had largely remained calm amid escalating Middle East conflicts, are seeing their confidence begin to erode. Three weeks into the Iran war, concerns are mounting that the conflict may not be resolved quickly and could inflict more severe damage on the economy and stock markets than initially anticipated. Over the past two trading sessions, the S&P 500 dropped 1.6%, falling below its 200-day moving average and hitting a four-month low. Meanwhile, the Europe Stoxx 600 index declined 2.4% on Thursday, reaching a three-month low.
According to Goldman Sachs' trading desk, clients who had earlier expected a swift resolution to the Iran war are beginning to express doubts. In a recent note, Goldman's Shawn Tuteja noted that while some investors remain bullish, others are now either bracing for a market correction or anticipating a slow, prolonged downturn similar to the pattern seen in 2022. Tuteja wrote in Thursday's report, "Although some still believe the situation could be resolved within the next week or two, a new narrative is emerging—one that suggests the conflict may have no clear end in sight."
The Middle East turmoil is introducing an additional stressor to markets, which were already grappling with concerns over the potential disruption of corporate business models by artificial intelligence, possible write-downs in private credit, and persistent inflation. Strategists at JPMorgan pointed out that while four out of the five oil shocks since the 1970s have triggered recessions, investors initially underestimated the potential economic harm from surging energy prices and a prolonged closure of the Strait of Hormuz.
These strategists noted in their report, "Although some froth has been removed from high-risk and speculative segments of the market, we still observe signs of investor complacency." They added that when crude oil prices rise by around 30%, the correlation between the S&P 500 and oil typically becomes "increasingly negative."
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