Traders at JPMorgan Chase outline three scenarios for the US stock market related to developments in the Middle East.
Starting with a “status quo” scenario, JPMorgan’s trading desk says stocks will see some near-term stability as tensions de-escalate on a limited basis and ships transiting the Strait of Hormuz remain largely restricted. reports Bloomberg.
“It would be a short-lived victory if Trump were to back down from his threats to Iranian infrastructure, seemingly deterring Iran from targeting Saudi oil production while deterring the Houthis from cutting off access to the Red Sea.”
In a bearish case, JPMorgan paints a scenario where diplomacy fails along with an increase in military activity, causing West Texas Intermediate crude (WTI) to spike between $125 and $150. In such a case, traders at the bank warn that the market is likely to see a “vomit everything” sell-off, with airlines most vulnerable, and companies in the energy, renewables and defense sectors likely to see demand.
“All things related to energy should be bought in stocks.”
As for the bull case scenario, traders are predicting an “all-out rally” if tensions de-escalate or government policies change. Traders say small-cap stocks and technology stocks will emerge to lead the market, while homebuilders and retailers will outperform. They also see financial services doing well in an improved macro environment, with precious metals getting a boost from a weaker dollar. Even in the bullish scenario, traders see energy stocks taking a hit.
At the time of writing, the S&P 500 is trading at 6,616, while oil is valued at $88.25 per barrel.
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