Wall Street Turns Wary as Mideast Risk Caps Stocks Near Record

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Wall Street Turns Wary as Mideast Risk Caps Stocks Near Record.

general :: 9hrs ago :: source - bloomberg

By Alexandra Semenova

(Bloomberg) -- Flaring tension in the Mideast is adding to worries over inflation and the timing of US interest-rate cuts, prompting at least one Wall Street firm to turn cautious on the prospect of the stock market’s climb toward another all-time high.

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Even as the S&P 500 Index rose Monday on hopes the conflict between Iran and Israel won’t spill over into a broader war, the trading desk at JPMorgan Chase & Co. shifted away from its tactically bullish view on US stocks, citing growing risks and the greater likelihood of a retreat.

“While there has been a strong buy-the-dip mentality with investors having been rewarded for fading negative news this year, we think it’s best to pull back on risk,” said Andrew Tyler, JPMorgan’s head of global market intelligence, who correctly predicted a multi-week stock rally back in April through this point. “Positioning indicates that irrespective of Israel-Iran, the market was setting up for a pullback,” he told clients early Monday.

Evidence is emerging that the risk-on momentum that has propelled the S&P 500 to a 21% gain from its April trough is hitting a rough patch. The gauge has been sitting near the 6,000 level for a month, while the stock market’s so-called fear index, or VIX, is hovering just below 20, showing continued investor angst over geopolitical developments and other risks.

Tyler’s latest call may have come before the market bounce following Friday’s slide, but others like Matt Maley, chief market strategist at Miller Tabak + Co. agree. He notes that even if the S&P 500 retests its all-time high, the downside risks are higher than upside potential at current valuation levels. The benchmark is 1.8% away from a record.

“Economic growth is still slowing, earnings forecasts are still dropping,” Maley said. “When you throw in geopolitical uncertainty, it’s not a good mix.”

Intensifying conflict in the Middle East comes at a time when the US equity market is already grappling with a bevy of crosscurrents. While data has pointed to economic resilience in spite of tariffs, and trade tension between the US and China seems to be easing, valuations have edged back toward levels seen in the first quarter. Also, Federal Reserve policymakers insist they’re in no rush to lower borrowing costs.

In a sign that investors have worries about an already-stretched market, the S&P 500 has barely budged in five trading sessions, posting a muted reaction to last week’s positive consumer and producer price index reports.

Over at Evercore ISI, US chief equity and quantitative strategist Julian Emanuel warns of potential volatility into the summer, with active managers likely to offload stocks in order to protect near-term profits given all the uncertainty from trade and geopolitics.

“Today’s dip buying is based on the belief that the Iran situation will be remediated rapidly,” he said. “That is not likely to be the case, and even if it were the case, there are a number of other overhanging issues.”

With stocks trading at more than 23 times Evercore’s 2025 earnings estimate, he added that investors are already pricing in the prospect of positive geopolitical resolutions without any real proof.