Despite the ongoing tensions in the Iran war, strategists at multiple Wall Street institutions are encouraging investors to refocus on buying opportunities in the U.S. stock market. The S&P 500 and Nasdaq 100 have experienced a correction this month, primarily due to geopolitical conflicts in the Middle East driving up oil prices and exacerbating inflation concerns, which has dealt a blow to market confidence. However, strategists from Barclays, CIBC Capital Markets, and Truist Advisory Services Inc. believe that investors should temporarily overlook short-term risks. They cite attractive valuations, solid earnings expectations, optimism related to artificial intelligence technologies, and the historical pattern of markets often rebounding after geopolitical shocks as supporting factors.
The S&P 500 is currently on track for its fifth consecutive week of declines, with a cumulative drop of nearly 6% since the outbreak of the Iran war. Market sentiment indicators are at low levels, typically viewed as a contrarian signal. In terms of valuation, the index’s forward price-to-earnings ratio over the next 12 months stands at 19.5 times, roughly in line with its ten-year average. Christopher Harvey, head of equity and portfolio strategy at CIBC Capital Markets, noted in a report that, overall, the stock market is currently in a “walk, don’t run” phase, but the starting gun has already been fired.
U.S. stocks experienced a significant sell-off on Thursday, with the S&P 500 falling 1.7% to 6,477.16 points, marking its largest single-day decline since January. As doubts linger over a near-term ceasefire agreement between the U.S. and Iran, the Cboe Volatility Index surged above 27, while the expected volatility gauge for the Nasdaq 100 hovered around 30.
Harvey has set a year-end target of 7,450 points for the S&P 500, implying upside potential of approximately 15% from current levels. He believes that as long as significant war risks do not materialize, now is an opportune time to gradually build positions, citing technology stocks including Google (GOOG), Apple (AAPL), Nvidia (NVDA), and Palantir (PLTR). JPMorgan’s trading desk has also shifted its view on U.S. stocks from tactically bearish to neutral, with its global market intelligence head stating that they are drawing up a “shopping list,” with the team currently long on energy stocks and mega-cap technology stocks. Keith Lerner, chief investment officer at Truist, advises clients to use the pullback to buy large-cap stocks while retaining some cash to navigate potential further volatility stemming from geopolitical developments.
The U.S. stock market is currently also supported by capital expenditures related to non-cyclical investment cycles, particularly in artificial intelligence, defense, and energy sectors. Market expectations point to a 15% growth in U.S. corporate profits this year, the largest increase since the end of the pandemic. Conflicting signals from the Middle East have led Wells Fargo equity strategists to suggest that this scenario creates an “upside pain trade” for investors, with mega-cap technology stocks and the Nasdaq 100 expected to outperform the broader market. Truist’s Lerner added that as the market corrects, the risk-reward profile is improving, and investors should prepare for a potential rebound by slowly and prudently adding to high-quality U.S. mega-cap stocks, reminding that “investors need to stay disciplined—not try to be a hero.”
