Early this week, heightened geopolitical tensions in the Middle East propelled international oil prices upward, triggering short-term risk aversion in global markets. Stocks generally weakened, while gold, crude oil, and the US dollar showed strength. Meanwhile, US Treasury prices fell and yields rose, reflecting the market’s assessment of the potential impact of rising oil prices on inflation expectations.
In response to the short-term market fluctuations, Mike Wilson, Chief US Equity Strategist at Morgan Stanley (MS), believes that such geopolitical shocks are typically insufficient to drag US stocks into a sustained downturn. He pointed out that, based on historical data, geopolitical risk events often do not cause lasting volatility in the stock market. For example, following such events, the S&P 500 index’s average returns over the subsequent 1 month, 6 months, and 12 months are approximately 2%, 6%, and 8%, respectively. The truly decisive variable is whether oil prices experience a “historic” and “sustained” surge.
After reviewing historical patterns in a report, Wilson found that the case most damaging to stock market performance over a 12-month period was the Yom Kippur War in 1973. The key factor was the subsequent oil supply shock that triggered an economic recession. This underscores the central role of oil prices in the transmission of geopolitical risks to financial markets. He believes that for a “bear market scenario” to be triggered in equities, two conditions must be met simultaneously: first, a sharp surge in oil prices with a year-over-year increase of 75% to 100%; and second, such a shock occurring during the later stages of the economic growth cycle. Absent either of these elements, geopolitical events are more likely to evolve into temporary market pullbacks rather than the starting point of a structural downturn.
Looking at the current situation, Wilson stated that it does not align with the aforementioned “high-risk combination.” The market is currently in an “early-cycle environment” with accelerating earnings recovery, and the year-over-year increase in oil prices is only a modest single-digit percentage (around 8%). Therefore, he judges that unless oil prices surge sharply in a short period and remain elevated, recent events are unlikely to alter his bullish outlook for US stocks over the next 6 to 12 months. He maintains his S&P 500 year-end target of 7,800 points. In terms of sector allocation, if investors lean towards defense, his most favored sector is healthcare.
The escalation of geopolitical tensions has also created clear sector divergence within the market. Defense and aerospace stocks benefiting from expectations of US military action, such as Lockheed Martin (LMT) and Raytheon Technologies (RTX), saw their share prices strengthen. Palantir Technologies (PLTR), a software company providing services to the US military, was also among the few pre-market gainers in the tech sector. On the other hand, airlines like United Airlines (UAL) and American Airlines (AAL) saw their share prices under pressure due to concerns over rising fuel costs and potential route disruptions.
