Yardeni raises the probability of market crash, Polymarket shows the risk of a recession in the United States rising to 37%

Investing.com — Since the outbreak of the Middle East conflict, market expectations of a U.S. recession have surged significantly, reflecting growing investor concerns about the economic impact of rising energy prices and geopolitical uncertainties. U.S. stock index futures declined in pre-market trading on Monday, with S&P 500 futures down 1.4%.

Data from prediction market Polymarket shows that the probability of a recession occurring this year has risen to 37% on Monday morning, the highest in three months. Before the outbreak of war on February 25, this probability was only 21%.

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One of Wall Street’s more optimistic strategists, Ed Yardeni, said that the sudden escalation of geopolitical risks is forcing investors to reassess the outlook for the U.S. economy and financial markets.

In a report discussing the impact of the conflict, Yardeni stated that even if broader economic expansion remains intact, rising oil prices could trigger market adjustments.

“Oil prices soaring could lead to a stock market correction rather than a bear market, but the latter is also possible,” he wrote.

Yardeni said his firm continues to view the “roaring 2020s” as the most likely scenario for the U.S. economy this year, assigning it a 60% probability. However, after the outbreak of war, the distribution of other possible outcomes has shifted significantly.

“We’ve reduced the probability of a blowout scenario from 20% to 5%, and increased the probability of a crash scenario (now including stagflation similar to the 1970s) from 20% to 35%,” Yardeni said when discussing the outlook for the remainder of the year.

Historically, sharp increases in oil prices have often coincided with recessions and bear markets. The surge in crude oil prices following Russia’s invasion of Ukraine in 2022 proved to be an exception. The U.S. economy avoided a recession, even though the stock market entered a bear market.

Yardeni noted that the current oil shock could again pressure the stock market but may not necessarily trigger a full-blown recession. The likelihood of a market decline of about 10% to 15% seems greater than a sustained bear market, although if investors start pricing in stagflation, the latter cannot be ruled out.

The strategist believes that the U.S. economy is less vulnerable to energy shocks than in past decades. As the economy shifts from manufacturing to services, energy intensity has significantly decreased, and improvements in fuel efficiency and technological advances have reduced dependence on oil.

Domestic production has also increased substantially. U.S. crude oil production (including natural gas liquids and renewable fuels) is now approaching a record 24 million barrels per day, surpassing the approximately 21 million barrels per day of domestic consumption, making the country a net exporter.

Nevertheless, long-term disruptions in energy markets could alter investor sentiment. Yardeni warned that if markets begin to anticipate a replay of stagflation shocks from the 1970s, the risk of a bear market will increase.

This article was translated with the assistance of artificial intelligence. For more information, please see our Terms of Use.