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Wall Street aims to look past Iran conflict

Despite recent volatility, Wall Street strategists point to signs that markets are trying to ignore the Iran conflict.

Even though oil has been above $100 since the war began, the S&P 500 (^GSPC) is down nearly 4%, nearly 6% below its all-time high.

“The message from the market is there’s still something out there,” Ryan Detrick, chief market strategist at Carson Group, told Yahoo Finance last week.

“We’ve endured so much negativity, and everyone on the other side is so worried that maybe the underwater beach ball will get some good news and that ball can come up,” he added.

A hint of that came last Tuesday, when the S&P 500 index rose 2.9%, its biggest gain since May, after President Trump signaled he was considering ending his military presence in Iran within the next two to three weeks.

“If Trump is declaring mission accomplished, then we are doing the same with our call for a stock market correction,” Ed Yardeni and Elias Griepentrog of Yardeni Research wrote after the rally.

They said their firm would likely reduce the chances of a recession from 35% to 20% once more clarity emerges about whether the conflict in the Middle East is truly over.

“Nevertheless, we maintain our S&P 500 year-end target at 7,700 and remain committed to our ‘Strong 2020’ base case,” they wrote.

Read more: How can you protect your money as turmoil in the Middle East fuels market volatility?

Strategists at UBS said the sharp rebound on positive headlines shows how a resolution to the dispute (or even the hope of a resolution) can quickly lift markets, “reinforcing the importance for long-term investors to remain invested and position to the upside.”

“We continue to believe that global equity markets will finish the year higher than today,” wrote Ulrike Hoffmann-Buchardi, chief investment officer for the Americas at UBS Global Wealth Management.

Although some economists have warned that prolonged energy costs raise the risk of stagflation, a lack of data has prevented Wall Street from lowering its profit forecasts.

Read more: What is stagflation and how does it affect you?

“Maybe [its] Because analysts have been flying a little too blind lately, but we haven’t seen a significant reduction in earnings estimates,” said Kevin Gordon, head of macro research and strategy at the Schwab Center for Financial Research.

“This is a reflection of the data so far that does not show that the economy is in dire straits, at least not right now,” he added.

In fact, heading into earnings season, companies and analysts are more optimistic than usual in their outlook for the first quarter. FactSet data.

The S&P 500 is expected to report annual earnings growth of 13.2%, compared to the estimated 12.8% calculated at the end of last year. This would mark the sixth consecutive quarter of double-digit annual earnings growth for the index.

“The volatility is troubling, the headlines are troubling. But looking 6 to 12 months from now, I wouldn’t be surprised if this bull market continues,” said Carson Group’s Detrick.

For this to happen, technology will need to reassert itself. Last quarter, the sector faced a combination of headwinds, including rising yields weighing on higher valuations, profit taking and equity losing its safe-haven appeal.

S&P 500 Sector year-to-date action

Despite last week’s market recovery, Tesla (TSLA), Alphabet (GOOG, GOOGL), Amazon (AMZN), Meta (META), Microsoft (MSFT), Apple (AAPL), and Nvidia (NVDA) have declined since the beginning of the year.

“Mag 7 has been confused, especially in the last quarter. And that’s unusual for them,” Eric Jackson, founder of EMJ Capital, said in his Opening Quote last week.

“I think these guys will catch offers in the second and third quarters,” he said.

Given the ongoing energy-related shock of the Middle East conflict and the threat of AI disruption, their strategies are tilted towards defense, asset-heavy and commodity-related sectors for now, Goldman Sachs analysts said.

“Our sector views are anchored in a preference for (1) Financials, (2) heavily-asset sectors with lower risk of technology obsolescence; (3) commodities and defense-related sectors,” he said in a note on Thursday.

“Overweights include Banks, Insurance, Energy and Aerospace & Defense,” they said.

Automotive, REITs and Food and Beverage, meanwhile, are also underweight, given their sensitivity to higher interest rates and rising oil costs, analysts said.