What the escalation means for US equities broadly
The conflict in the Middle East comes at a complicated time for the US equity market, as our sentiment and seasonality work has been suggesting stock prices could keep moving up while our valuation/earnings and GDP analysis has been suggesting that the stock market has gotten ahead of itself, keeping us on guard for a pullback.
As we’ve discussed recent developments in the Middle East with RBC’s Commodity Strategy and MENA research team, two key risk factors for US equities have come into focus for us: their view that the conflict could take some time to play out, and the risk that it evolves into a broader, regional conflict.
“Two key risk factors for US equities have come into focus for us: their view that the conflict could take some time to play out, and the risk that it evolves into a broader, regional conflict.”
Lori Calvasina, Head of U.S. Equity Strategy, RBC Capital Markets
The broader the conflict becomes and the longer it lasts, the more problematic we think it will be for US equity markets. We see three potential challenges for the US equity market, which we are monitoring closely.
- Historically, heightened uncertainty on national security policy tends to put downward pressure on stock market valuations.
- We’re worried the situation in the Middle East could derail the sentiment recovery that’s been underway, as seen in a number of recent investor, consumer, small business, and C suite surveys – we think this issue matters a great deal as the recovery in sentiment has been one of the most important drivers of recent stock price action.
- We are obviously watching oil prices – a major, sustained spike could impact headline inflation - which our Econ team notes could muddle the Fed’s inflation outlook, and which our own modeling suggests could put downward pressure on equity market valuations. It could also add to angst over growth at a time when tariffs impacts may be starting to hit.
