Truist Expects Middle East Conflict to Cool in Coming Weeks

Middle East conflict continues to trouble the markets. Jefferies global macro strategist Mohit Kumar predicts that this conflict is likely to cool down in the coming weeks, and the chances of it causing market turmoil for several months are low.

He explains that the number of weapons involved in the conflict, the war costs, and inflationary pressures on the U.S. will all limit the duration of the conflict. International oil prices remaining above $100 per barrel for two to three months will also likely hurt President Trump’s performance in the midterm elections.

Kumar does not rule out the possibility that the conflict could escalate further within the next two weeks, as both Iran and the U.S. seek to find a way out (off-ramp). For example, the U.S. might try to reopen the Strait of Hormuz, and if successful, it could declare victory in the entire conflict.

For these reasons, he believes the Middle East situation will not lead to a broad risk-off in the markets. Oil prices are expected to return to $80 and $70 per barrel within 6 and 12 months, respectively. When oil prices fall below $80, market sensitivity to future U.S.-Iran conflicts will also decrease.

However, Kumar warns that even if a ceasefire is reached, high oil prices will still transmit ripple effects, leading to increased inflation and weakened economic growth, ultimately impacting investment markets. He estimates that a $10 increase in oil prices will raise overall U.S. inflation by 0.2% to 0.4%, and similarly slow economic growth by about 0.2% to 0.4%, potentially causing the U.S. to fall into stagflation.

Since small and medium-sized enterprises generally hold less cash, they will be more affected by stagflation, which is unfavorable for small and mid-cap stocks. Additionally, stagflation will impact sectors such as consumer, travel, and hospitality, causing these stocks to underperform over the next 6 to 12 months.

Conversely, if the conflict persists, defense, military, and commodity metal stocks are expected to perform well over the next 12 months, as the former benefits directly from increased defense spending worldwide, and the latter from raw materials used in weapons manufacturing. Kumar also forecasts that the firm may revise its 12-month target for the S&P 500 index downward from the current 7,500 points to below 7,000, depending on the situation.