Wall Street Strategists Reassess Market Outlook Amid Middle East Conflict

The recent conflict in the Middle East has significantly impacted Wall Street's economic outlook for 2026, prompting strategists to recalibrate their forecasts. Following a fragile ceasefire, traders returned to risk assets, leading to a notable 3.6% increase in the S&P 500 Index, the largest jump since late November. However, concerns linger regarding the war's long-term effects on inflation, energy supplies, and the Federal Reserve's monetary policy. The conflict has already caused a surge in oil prices, with one benchmark exceeding $144 per barrel, contributing to the most substantial monthly inflation increase since 2022. This situation has raised doubts about the Fed's ability to implement interest rate cuts, with traders anticipating only a slim chance of a quarter-point reduction before the year's end.

Bloomberg

Wall Street strategists are adapting their investment strategies in light of the evolving economic landscape. David Kelly, chief global strategist at JPMorgan, expressed optimism about artificial intelligence's potential to drive growth, despite the unexpected rise in gasoline prices due to the conflict. He noted that inflation could reach 4% this summer but may dip below 2% next year, potentially allowing for one or two rate cuts in 2027. Conversely, Alexandra Wilson-Elizondo, co-head of multi-asset solutions, indicated that the Fed is likely to remain cautious until clearer growth and inflation trends emerge.

Bloomberg

Jean Boivin, head of BlackRock Investment Institute, highlighted the uncertainty surrounding the conflict's economic implications, suggesting that the damage from supply shocks could lead to stagflation. He emphasized the need for careful monitoring of interest rates and inflation pressures, which may hinder the Fed's ability to cut rates in 2026. Ann Miletti, head of equity investments, revised her expectations for Fed rate cuts, now predicting that one cut could be delayed until 2027.

Bloomberg

Despite the challenges, some strategists maintain a positive outlook. Julian Emanuel from Evercore ISI pointed to resilient earnings and contained bond yields as indicators of potential market stability. He noted that the key factor will be whether oil prices remain elevated for an extended period. Citigroup's Scott Chronert echoed this sentiment, emphasizing the transitional nature of current market conditions while acknowledging risks such as prolonged oil surges and stress in the private credit industry.

Bloomberg

Several financial institutions have adjusted their year-end forecasts for the S&P 500. One bank downgraded its target from 7,800 to 7,300, while still maintaining a bullish outlook, anticipating that tax refunds could mitigate some economic pressures on households. Ohsung Kwon, chief equity strategist, remarked on the reduced economic sensitivity to oil compared to previous cycles, suggesting that equities could still perform well unless significant earnings deterioration occurs.

Bloomberg

There is a notable divergence in expectations regarding the Fed's actions and the broader economic impact of the conflict. While some strategists foresee potential rate cuts, others express skepticism about the Fed's ability to respond effectively to inflationary pressures. The uncertainty surrounding the geopolitical landscape continues to create challenges for market predictions, leaving many strategists in a state of cautious optimism as they await clearer signals from the economy.

Bloomberg

• “If anything, there’s even more promise in AI than there was three months ago,” — David Kelly, Chief Global Strategist, JPMorgan

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• “It’s simply too early to make a definitive call. This is a market still searching for clarity.” — Ohsung Kwon, Chief Equity Strategist

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• “The key difference this year is oil’s unique ability to shape whether the economy trends toward growth, stagnation, or recession,” — Julian Emanuel, Chief Equity and Quantitative Strategist, Evercore ISI

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• “We could see that coming to fruition in Europe,” — Alexandra Wilson-Elizondo, Co-Head of Multi-Asset Solutions, JPMorgan

Bloomberg