It was only six weeks ago that Wall Street seemed to be singing from the same bullish stock-market hymn sheet: performance was broadening, technology stocks were still leading, the Federal Reserve was cautious but still likely to lower interest rates, and the economy appeared solid, with the job market stable and fiscal tailwinds poised to kick in.
Collectively, those factors were expected to power stocks higher into the fourth year of the rally, taking the S&P 500 to fresh record highs with a good chance of reaching the 8000 level by the end of the year.
The speed with which nearly every aspect of that assessment has changed since then, however, has been jarring—and it could drag stocks into correction territory, or worse, in the coming months.
The economy may be slowing.
Friday’s update to the Bureau of Economic Analysis’ estimate of fourth-quarter GDP was lowered to just 1.7%. About 92,000 jobs were lost in February, based on the latest official data, and inflation gauges are accelerating.
The Fed, long expected to deliver at least two—and possibly three—rate cuts this year, now finds itself constrained by rising prices and a weakening labor market. Traders have not only pared those bets down to one, but are also pricing in the possibility of an interest-rate hike in December.
A big move higher in Treasury bond yields, with 30-year paper back to testing the 5% level, not only weighs on stock market valuations and profit forecasts, but also makes additional fiscal stimulus to “run the economy hot” ahead of midterm elections less likely.
The conflict with Iran, meanwhile, shows no signs of ending. Oil is still north of $100 a barrel, having risen more than 45% over the past month, and futures suggest prices won’t return to prewar levels until August next year.
Then there is the looming specter of a private credit lending crisis for good measure.
“There are some serious issues which are weighing on investor sentiment,” said David Morrison, senior market analysts at Trade Nation. “But the bears should be cautious; recent weakness could reverse suddenly, especially if Middle Eastern hostilities were suddenly to end.”
That may explain why Wall Street hasn’t yet abandoned its year-end price targets for the S&P 500.
“We need to acknowledge several unforeseen headwinds that are clouding our full-year equity views published headed into this year,” Citigroup analyst Scott Chronert said in a note published Monday that maintained the bank’s S&P 500 price target of 7700.
“However, the duration of the Iran conflict and private credit uncertainty, along with AI disruption and funding concerns, present tail risks that cannot be ignored,” he said.
Goldman Sachs also reiterated its 7600 S&P 500 price target Monday, citing stronger earnings forecasts and cheaper valuations.
Morgan Stanley’s Mike Wilson, however—who often takes a more cautious view of markets regardless of the economic or geopolitical backdrop—thinks stocks could decline another 5% from current levels, reaching around 6300 by April before rebounding.
“The fundamental backdrop going into this event (the U.S.-Iran war) was simply stronger than it was last year (when markets sold off heavily in the wake of President Donald Trump’s tariff unveiling),” he told CNBC on Monday. “Recession risk is very low, unless oil shoots up to $120 a barrel and stays there.”
That could prove to be a significant caveat.
Bank of America analysts, led by Savita Subramanian, note that the S&P 500 is trading at a higher premium relative to oil prices than any point since the 1960s—apart from two periods: when crude went negative during the Covid pandemic and when stocks hit then-record highs at the peak of the dot-com bubble.
That suggests stocks are still betting on a de-escalation of the conflict and a pullback in crude prices over the near term.
Others are less convinced.
Warren Patterson, head of commodities strategy at ING, sees at least one scenario in which the war extends into April, with lower-grade confrontations to follow that disrupt energy flows through the Strait of Hormuz into August.
“Oil prices spike to record highs under this scenario, and will need to remain elevated to balance the market through demand destruction,” he said.
If that happens, significant revisions to Wall Street’s forecasts would likely follow.
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