U.S.-Iran Conflict Spills Into Equities? JPMorgan: S&P 500 Could Plunge 15% if Oil Fails to Cool Down!
JPMorgan Private Bank recently stated that the recent sell-off in the S&P 500 could intensify if oil prices do not retreat.
In a note to clients, the bank's researchers expressed their belief that rising oil prices could trigger a "domino effect" in the U.S. stock market. Under this scenario, as oil prices remain sustained at high levels, losses in U.S. equities would spread globally, intensifying selling pressure and ultimately striking a blow to economic growth.
As the oil market closely monitors supply disruptions in the Middle East, the international benchmark, Brent crude, hovered around $100 per barrel last week.
Kriti Gupta, Executive Director at JPMorgan Private Bank, and Senior Market Economist Joe Seydl warned that if oil prices remain above $90 per barrel for an extended period, it could trigger a 10% to 15% correction in the S&P 500, with spillover effects hitting international and emerging markets.
"As oil prices rise to $120 per barrel or higher, the sell-off in the S&P 500 will intensify. A domino effect could exacerbate the equity decline over time," they wrote.
They further cautioned that this "domino effect" threatens to continuously impact the U.S. economy, explaining that rising oil prices damage economic growth through two primary channels:
On one hand, Americans are already paying more at the pump. According to AAA data, as of last Friday, the national average for gasoline has risen to $3.63 per gallon, a 21% increase since the onset of the U.S.-Iran conflict.
On the other hand is the wealth effect. U.S. citizens may begin to pull back on spending as they assess the impact on the stock market and the resulting damage to their paper wealth. According to the latest Federal Reserve data, U.S. households held a total of $56.4 trillion in stocks and mutual fund shares in the third quarter.
JPMorgan estimates that a 10% decline in the S&P 500 could lead to a roughly 1% reduction in U.S. consumer spending.
"Now, combine all these factors. The cumulative effect of sustained high oil prices and a bear market in the S&P 500 would create a devastating demand-side impact, significantly intensifying the shock to economic growth," the report stated.
In the two weeks since the outbreak of the U.S.-Iran war, markets have remained concerned about the broad implications of rising oil prices. The chief concern is that crude spikes could drive inflation higher while simultaneously stifling economic growth. With the U.S. economy already showing signs of a slowdown, several forecasters raised their recession probability estimates last week, noting that the war is undeniably exacerbating the situation.