The war in Iran may be showing few signs of easing, but Wall Street strategists are encouraging investors to start buying stocks again.
This month’s pullbacks in the S&P 500 and Nasdaq 100 indexes have sapped investor sentiment as hostilities in the Middle East push oil prices higher and raise inflation fears. Still, stock market strategists at Barclays Plc, CIBC Capital Markets and Truist Advisory Services Inc. are advising clients to look past the near-term risks, citing attractive valuations, solid profit estimates, optimism over artificial intelligence technology and a history of market rebounds after geopolitical shocks.
Their views offer a dose of confidence to traders watching the S&P 500 head for its fifth consecutive down week, having shed almost 6% since the war in Iran started. Sentiment indicators, which usually offer contrarian signals, are hovering near depressed levels. And the index is valued at 19.5 times earnings over the next 12 months, in line with its average over the past decade.
“Overall, it’s a walk not run type situation with equities but the starter’s pistol has gone off,” Christopher Harvey, head of equity and portfolio strategy at CIBC Capital Markets, wrote in a research note Thursday.
Equity bears were in control on Thursday, as the S&P 500 fell 1.7% to 6,477.16 in its worst day since January. The Cboe Volatility Index jumped above 27 amid skepticism that the US and Iran will reach a ceasefire any time soon. A gauge of expected price swings in the Nasdaq 100 hovered near 30.
The rout pushed the S&P 500 almost 1,000 points below Harvey’s year-end target of 7,450, indicating a 15% upside if the strategist is correct and the biggest war-related risks fail to materialize. While acknowledging Iran-related uncertainty, Harvey advised investors to “start putting money to work in a slow and methodical fashion,” pointing to stocks such as technology giants Alphabet Inc., Apple Inc., Nvidia Corp. and Palantir Technologies Inc.
Harvey isn’t the only one seeing buy signals. JPMorgan Chase & Co.’s trading desk flipped its US equity view to neutral from tactically bearish on Wednesday, with Andrew Tyler, the firm’s head of global market intelligence, saying he’s building a “shopping list.” His team is long energy and mega-cap technology stocks.
At Truist Advisory Services Inc., Keith Lerner is encouraging clients to use pullbacks to buy large-cap stocks, among others, while keeping some cash on the sidelines in case geopolitical tensions push stocks even lower.
“If you have cash, you don’t want to necessarily just wait for the perfect opportunity because it could be something that comes from a headline that you just aren’t going to be able to react to in time,” said Lerner, the firm’s chief investment officer and chief market strategist. “There might be an opportunity to be more aggressive if we get a true flush.”
Investors may also be encouraged by what Barclays Plc called a “remarkably consistent pattern” of positive stock market returns following geopolitical crises.
For example, the S&P 500 gained 2.5% in the three months after the terrorist attacks on the World Trade Center on Sept. 11, 2001. It jumped 13% after the second Gulf War began in 2003. And it’s up 60% since the Russia-Ukraine conflict, Barclays analysts Ajay Rajadhyaksha and Amrut Nashikkar wrote in a Thursday research note.
“History is compelling,” they said.
In the current case, US stocks are buttressed by what the analysts call an “acyclical investment cycle,” which includes AI-related capital outlays as well as defense and energy-related spending. US corporate earnings are also expected to grow 15% this year in the biggest advance since the aftermath of the Covid-19 pandemic. “There is a wall of worry – but it’s worth climbing,” they said.
Meanwhile, headlines from the Middle East are sending conflicting messages. On Thursday morning, President Donald Trump threatened intensified military action after Tehran rejected Washington’s push for a peace deal. Then on Thursday afternoon, Trump said the talks were going “very well” and pushed back his deadline for Iran to reach an agreement or face further attacks.
To Wells Fargo equity strategist Ohsung Kwon, the setup creates an “upside pain trade” for investors, where mega-cap technology companies and the Nasdaq 100 are expected to outperform sharply.
“The risk-reward is improving as the market pulls back,” said Truist’s Lerner, adding that market retreats are the “price of admission” for investors to get into the market at compelling prices. He recommends positioning for a potential bounce by taking a slow and prudent approach to adding exposure to quality US mega-cap stocks. “Investors need to be aware – not try to be a hero,” Lerner said.
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