- The S&P 500 could see a correction from its recent peak if the Iran war continues, JPMorgan said.
- The analysts are tactically bearish, but said a "definitive off-ramp" to the conflict would reverse their call.
- Morgan Stanley, meanwhile, argued that the market's rolling correction since last fall is almost over.
JPMorgan analysts warned clients that a prolonged war with Iran could send the S&P 500 into correction territory.
The bank's trading desk said its view has turned tactically bearish, explaining that positioning signals investors aren't positioning for further market risks even as volatility surges.
Options pricing implies the S&P 500 could drop another 2.9% this week, the analysts said, adding to last week's losses. They added that the war could send the benchmark index to 6,720, a 10% correction from its most recent peak.
"There has been a clear escalation with oil infrastructure hit on both sides … The precedent of oil infrastructure under attack has officially begun and we believe the products rally seen last week is just starting," JPMorgan's commodities trading desk wrote.
"Every single day of blockage through the strait creates exponentially larger problems for products down the road," the analysts said, warning that declining production in the region is "rapidly approaching" a level consistent with prices hitting $120 a barrel.
They highlighted that it took nearly five months for oil prices to fall under $100 from their peak of nearly $125 after Russia's invasion of Ukraine. The team said that it would take a "definitive off-ramp to the conflict" to end their bearish tactical call.
Morgan Stanley stays (mostly) upbeat
Morgan Stanley's chief investment officer, Mike Wilson, wrote that the bank maintains its bullish stance on stocks over the next six to 12 months, despite recent headline risk.
According to Wilson, the market has been in a "rolling correction" since October, with returns relatively flat despite strong earnings results.
The firm said the market is closer to the end of its rolling correction, with a sustained oil price increase the only potential factor that could complicate that view. The bank said last week that oil remaining above $100 for a long period would potentially derail its bull case for the stock market.
Wilson said to expect near-term weakness, but he said it offers an entry point to buy into cyclical sectors poised for gains like financials, discretionary goods, and industrials.
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