Israel-Iran Crisis: Markets Shrugging Off Tensions? Strategists Tell Why Bar For Bigger Selloff Is Higher This Time

The U.S. stock market has so far been relatively resilient to the Israel-Iran conflict that continues to rage unabated.

The S & P 500 Index, a measure of broader market performance, ended Friday, the day Israel launched its first strikes, down 1.1%. The downside was more due to a stronger-than-expected consumer sentiment reading that dampened rate cut hopes.

The S & P 500 Index advanced nearly a percent on Monday despite the rising Middle East tensions.

The Invesco QQQ Trust (QQQ) ETF and the SPDR S & P 500 ETF (SPY),exchange-traded funds (ETF) that track the Nasdaq 100 and the S & P 500 indices, climbed 1.39% and 0.95%, respectively.

Analysts and market strategists, who weighed in on the muted market reaction to the geopolitical tension, cited factors such as a lack of supply chain shocks that could derail growth and the already light equity weighting seen currently.

Henry Allen, London-based macro strategist at Deutsche Bank, reportedly told CNBC, "Historically, it's only been when it's affected macro variables like growth and inflation.”

The strategist said the geopolitical events that mattered for the markets so far were the stagflation shocks, like the 1970s oil crises, the Gulf War in 1990 and Russia's invasion of Ukraine in 2022.“Today, we haven't seen a shock on that scale so far.”

Allen noted that oil has retreated after spiking past $75-a-barrel in the aftermath of the Israeli-Iran crisis.

Deutsche Bank's global head of fundamental credit strategy, Jim Reid, said equity positioning is already relatively light now, and therefore, the“bar for a more significant sell-off is higher this time.”

HSBC Global Research Equity Strategist Alastair Pinder suggested even in the eventuality of a sell-off, the market typically comes back up rapidly.“Although equity markets have historically proven quite resilient to geopolitical events - in 60% of the major events since 1940, U.S. equities were up in the subsequent three months,” he said.

The notable exception has been an oil shock, when equities fell 8% over the next two months, he added.

Sevens Report's Tom Essaye attributed the muted reaction to his view that Iran's military capabilities have now been degraded and that the Islamic nation's ability to counter Israel's military superiority is severely inhibited, Marketwatch reported.

LPL Financial Chief Equity Strategist Jeff Buchbinder also downplayed the impact.“Every conflict is of course different, but reviewing a list of 25 geopolitical shocks.....reveals that stocks have historically been quite resilient in the face of these shocks,” the strategist said.

“Total drawdowns around these events have been fairly limited as well, averaging 4.6% (median 2.9%) over an average of about 19 days (median 8 days),“ Buchbinder said.

“Recoveries to pre-event levels have taken longer, averaging 40 days (median 18), but we're still talking about an interruption of only a few weeks to a couple of months typically.”

Among the factors the strategists listed for the resilience in the wake of the most recent Middle East tensions are the  likelihood of regime change in Iran and a resulting“peace dividend”, U.S. energy independence, Israel's interest in limiting the suffering of Iranian civilians and both players have limited resources and an interest in keeping the conflict contained.

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