Market volatility hinges on crude, not missiles, say analysts
Despite escalating tensions in the Middle East, equity markets remain resilient. Analysts now argue that the real threat to stocks isn’t war — it’s oil.
“Oil prices will determine whether volatility persists,” Morgan Stanley’s Chief Investment Officer Mike Wilson told clients Monday. The warning comes as Brent crude and West Texas Intermediate (WTI) futures plunged nearly 9%, with Brent falling below $71 and WTI dropping to $67.50 a barrel.
The equity markets responded positively. The S&P 500 and Nasdaq both gained close to 1%, while the Dow Jones added nearly 400 points. Markets rallied following reports that Iran launched missiles toward U.S. bases in Iraq and Qatar — but oil prices dropped sharply after initial spikes overnight.
Why oil matters more than missiles
Wilson cautioned that a major oil price shock — typically defined as a 75% year-over-year increase — is required to meaningfully disrupt equities. In current terms, that would require WTI to breach $120 a barrel. Without that spike, stocks may continue to climb despite geopolitical unrest.
“The bear case for equities tied to the recent Middle East conflict would be significantly higher oil prices, which could threaten the business cycle,” Wilson added.
Stuart Kaiser, Citi’s head of U.S. equity trading strategy, echoed the view: “We still see sharply higher oil prices as the channel for geopolitical risks to impact stock markets.” He warned that geopolitical distractions could overshadow economic data in the short term.
Strait of Hormuz remains key variable
The Strait of Hormuz, which handles nearly 20% of the world’s oil flows, remains a flashpoint. While Iran’s parliament voted to close the strait, the final decision lies with Supreme Leader Ayatollah Ali Khamenei and the Supreme National Security Council.
David Oxley of Capital Economics noted that closing the strait would damage Iran’s own economy more than the U.S., now a net energy exporter. “The costs to Iran of closing the Strait of Hormuz may be too high,” he wrote.
Ed Yardeni of Yardeni Research believes Iran will ultimately “sue for peace.” If tensions ease, “the price of oil should fall and stock markets around the world should climb higher,” he said, reaffirming his S&P 500 year-end target of 6,500.
