Oil price shock impact is underestimated! JPMorgan cuts S&P 500 target price and warns the market is overly complacent

Ask AI · Why did JPMorgan warn that market complacency could trigger an economic recession?

Caixin News March 20 (Editor Bian Chuan) JPMorgan recently lowered its year-end target for the S&P 500 index in 2026 from 7,500 points to 7,200 points, warning that investors’ expectations that “the surge in oil prices will be short-lived” are overly complacent.

Since the outbreak of the US-Iran conflict three weeks ago, despite a significant rise in oil prices, the performance of the US stock market has remained resilient. JPMorgan stated that this relative calm in the market is based on investors’ “high-risk assumptions,” which reflect complacency regarding the war situation.

“We believe the market is pricing in a quick end to the Middle East conflict and the reopening of the strait, thereby underestimating the potential demand shock,” JPMorgan pointed out. “This is a high-risk assumption because typically, after oil prices surge by about 30%, the correlation between the S&P 500 index and oil prices becomes more negatively correlated.”

Since the US and Israel launched strikes against Iran at the end of last month, oil prices have risen by more than 46%, while the S&P 500 index has fallen by less than 4%.

US stocks closed lower on Thursday, as inflation concerns triggered by soaring oil prices made investors more pessimistic about future rate cuts. The S&P 500 index fell by 0.27%, closing at 6,606.49 points.

JPMorgan analysts stated that investors are more focused on hedging rather than broadly reducing risk exposure; there has been a sell-off in high-risk speculative areas such as software, South Korean stocks, and cryptocurrencies, which has squeezed some bubbles out of the market, but complacency still exists.

“The market’s attention is focused on the inflation impact of rising oil prices, but in our view, the larger and more consequential issue is: if the Strait of Hormuz fails to reopen, the potential negative transmission mechanisms will impact demand,” the analysts wrote.

Bank of America also expressed similar concerns, warning that investors are overly focused on the inflation impact of the conflict while ignoring a more significant risk—the possibility that prolonged conflict could trigger a synchronous global economic slowdown.

This week, Citadel Securities also issued a similar warning, noting that it sees risks shifting from inflation to economic growth.

JPMorgan warned that the resulting oil supply gap would drag down global GDP and slow income growth while raising the risk of recession. The bank noted that four of the five oil shocks since the 1970s have led to economic recessions; “this is not surprising,” as supply shocks often translate into demand destruction.

The oil shock triggered by the Iran war comes at a time when the market is facing many challenges. JPMorgan listed several challenges, including concerns about private credit, a weakening momentum in AI trading, a purchasing power crisis, a cooling labor market, and the Fed’s struggle to manage the economy amid difficult balancing acts.

(Caixin News Bian Chuan)