US-Iran Tensions Spread to Stock Market? JPMorgan: If Oil Prices Don't "Cool Down," S&P 500 Could Plunge 15%!

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March 16, 2023 (Editor: Huang Junzhi) — JPMorgan Private Bank recently stated that if oil prices do not fall back, the recent sell-off in the S&P 500 could intensify.

In a report to clients, the bank’s researchers said they believe that rising oil prices could trigger a “domino effect” in the U.S. stock market. In this scenario, as oil prices remain high, losses in the U.S. stock market could spread globally, increasing selling pressure and ultimately harming economic growth.

Since the oil market closely monitors supply disruptions in the Middle East, international benchmark Brent crude has hovered around $100 per barrel last week.

Kriti Gupta, Managing Director of JPMorgan Private Bank, and senior market economist Joe Seydl warned that if oil prices stay above $90 per barrel for an extended period, it could trigger a 10%-15% correction in the S&P 500 and spill over into international and emerging markets.

They wrote, “As oil prices rise to $120 per barrel or higher, the sell-off in the S&P 500 will intensify. The domino effect could exacerbate stock market declines over time.”

They further warned that the “domino effect” might continue to impact the U.S. economy, explaining that rising oil prices could harm economic growth in two ways.

First, Americans are already paying more at the pump. According to AAA, as of last Friday, the national average gasoline price had risen to $3.63 per gallon, a 21% increase since the start of the Iran-U.S. conflict.

Second, there is the wealth effect. U.S. households may start to cut back on spending as they assess the impact on the stock market and their wealth. According to the Federal Reserve’s latest data, U.S. households held $56.4 trillion in stocks and mutual funds in the third quarter.

JPMorgan estimates that a 10% decline in the S&P 500 could lead to about a 1% reduction in U.S. consumer spending.

“Now, combine all these factors. The sustained rise in oil prices and the bear market in the S&P 500 could produce a destructive demand effect, significantly amplifying the impact on economic growth,” the report states.

Since the outbreak of the Iran-U.S. conflict two weeks ago, markets have been concerned about the widespread effects of rising oil prices. The main worry is that higher crude prices could boost inflation while suppressing economic growth. Meanwhile, the U.S. economy’s growth appears to have already slowed, prompting some forecasting agencies to raise the probability of a recession last week, with the war undoubtedly adding to the pressure.

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Editor: Li Tiemin