U.S. stocks opened higher but closed lower on Monday, with selling pressure intensifying. Major indices recorded their longest weekly losing streak since 2022, driven by escalating concerns over the Middle East conflict—more U.S. troops have arrived near Iran, heightening risks of a broader confrontation. The S&P 500 initially rose 0.9% during the session but reversed to close down 0.4%, reaching its lowest level since August of last year. It now sits less than one percentage point away from a technical correction, defined as a 10% decline from its peak. The Nasdaq 100 Index, which entered correction territory last Friday, fell an additional 0.8%.
The White House has threatened to escalate strikes against Iran, potentially targeting key civilian energy infrastructure. Although former President Trump claimed diplomatic progress, there are currently no signs of a ceasefire. He warned on social media that if the Strait of Hormuz is not reopened promptly, Iranian energy assets would be targeted.
Investors are also digesting conflicting signals from Federal Reserve Chair Jerome Powell. He reaffirmed the Fed's commitment to achieving its 2% inflation target but acknowledged that the central bank has limited tools to address supply-side shocks, such as the surge in energy prices caused by Middle East instability.
Growing concerns about economic growth and reduced expectations for Fed rate hikes have pushed U.S. Treasury prices higher. Meanwhile, U.S. oil prices closed above $100 per barrel for the first time since 2022. Energy stocks have now rallied for 14 consecutive weeks, setting a record for the longest weekly winning streak in history.
Despite the downturn, Morgan Stanley strategist Mike Wilson suggests that increasing evidence indicates the stock market decline over the past five weeks may be "nearing its end," implying that investors are pricing in growth risks more aggressively than widely expected. Similarly, Goldman Sachs' trading desk notes that hedge funds are beginning to show signs of capitulation, while systematic funds' selling momentum is weakening. The desk anticipates that commodity trading advisors (CTAs) will become buyers under any scenario within the next month.
The S&P 500 is currently experiencing its worst monthly performance since 2022. The Nasdaq 100 has fallen 12% from its October 2022 peak, officially crossing the technical correction threshold last Friday. The sell-off stems from fears that escalating Middle East tensions could drive up oil prices, stifle economic growth, and reignite inflation.
Weakness in large-cap technology stocks is emitting signals that have historically preceded sector turning points. The Nasdaq 100 currently trades at a forward price-to-earnings ratio of about 21 times, based on earnings projections for the next 12 months, representing a premium of only 1.7 percentage points over the S&P 500. The last time the index's valuation premium was this low relative to the broader market, it went on to outperform the S&P 500 by a record margin over the following year.
J.P. Morgan's strategy team emphasizes that the current environment differs significantly from 2022. Back then, the Russia-Ukraine conflict and pandemic-related disruptions drove inflation to a 40-year high. Today, with policy rates elevated, wage growth moderating, and artificial intelligence (AI) development increasing deflationary risks over stagflation risks, the outlook is distinct. A team led by strategist Mislav Matejka noted, "Judging by price action, the market is not pricing in a recession, but neither is it exhibiting widespread complacency."
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