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We have revised down our probability of a “Quick Deal” from our last publication. US economic and earnings data is still resilient, in our view. Risk management for our various portfolios is being dictated by the risk tolerance and time horizon of the strategy.
A couple of weeks ago, we published our Iran scenario analysis to dimension out war probabilities and their implications for markets and portfolio strategy. Today we update our views with new information gleaned since our last piece.
Oil prices have remained well above $100 per barrel as the war has intensified. The roughly 54% trough-to-peak spike in Brent crude since late February is beginning to resemble past historic oil shocks. Damage to neighboring nations’ oil and gas facilities suggests energy supply normalization may take longer than expected even once the Strait of Hormuz is cleared.
As a result, we have reduced our “Quick Deal” probability—defined as oil quickly returning to the $55–70 range—from 10% to 5%. The weighting has been shifted into our “Wider War” scenario, now at 30%.
That said, we are reluctant to rule out a “Quick Deal” pivot over the next couple of months. In a midterm election year, committing ground troops is politically unpopular, as are inflation spikes—both of which increase the potential for the Trump Administration to seek an “off-ramp” before summer. For this reason, we have not dramatically altered our probabilities yet.
The specter of war clearly hung over last week’s Fed meeting. Despite one dissent, the Fed kept rates unchanged, citing solid growth and near-term inflation uncertainty. Fed funds futures now price in no cuts in 2026—a notable shift from pre-conflict expectations. With Jerome Powell signaling he intends to serve until the government investigation concludes, a rate cut before the second half of 2026 seems unlikely.
These factors complicate the forward view for economic growth and Fed action. However, with US GDP annualizing above 2%, solid PMI data, unemployment below 5%, and strong earnings momentum, we believe the US economy is well positioned to weather a near-term energy spike.
We view $100+ oil lasting six weeks or less as painful but manageable. If oil stayed at the high end of our “Wider War” range for two months or more, we would likely raise our recession risk to significantly above 30%, prompting a reassessment of our positive outlook on the US corporate earnings cycle—a major pillar of our constructive view of US stocks.
Beyond oil, we would reconsider our stance if any of the following occurred: an Arab state attacking Iran; coordinated Iran-linked attacks on Western soil; or Russian and and/or Chinese military intervention. Because none of these “gamechanger” events have occurred, we continue to view this episode as similar to past Middle Eastern conflicts, which have generally had only temporary effects on US stocks.
Two weeks ago, we suggested a “decision box” was shaping up for the S&P 500 as investors placed probabilities on various war endgames. In a “Muddle Through” scenario, we expect the S&P 500 to generally remain within this box between roughly 6,500 and 7,000. A ceasefire sometime between now and late spring could see a break to new highs, but in the “Wider War” scenario, stocks could break down significantly through the bottom of the box.
Our next key support level exists near the 23% retracement of the April 7 low at 6,490, where we have drawn the bottom of the decision box. A meaningful breach of that level could potentially trigger a more significant asset reallocation in our lower-risk balanced portfolios.
Our technical risk processes remain on alert, particularly for shorter-horizon portfolios (five to seven years and under), which tend to react more quickly to technical deterioration. These portfolios recently reduced equity exposure by roughly 7%, trimming individual US stock holdings that had grown large during the multi-year rally. Longer-horizon portfolios are less likely to react to geopolitics unless we see meaningful fundamental deterioration.
All balanced portfolios remain overweight equities, though shorter-horizon portfolios are now much closer to neutral.
We are watching events in the Middle East with humility and intellectual flexibility, noting that geopolitics can change quickly. The current roughly -7% S&P 500 pullback is being contextualized as consistent with periodic 5–10% pullbacks that are common in cyclical bull markets, often acting as a “pressure release valve” that resets expectations.
Sentiment—measured by the NDR Daily Crowd Sentiment poll and net flows into US equity ETFs—is approaching extreme pessimism, though we do not believe a tradable level of capitulation has yet occurred. Risk management triggers remain on high alert, while the portfolio team is also sizing up potential additions to equity themes to add when the conflict shows signs of resolution.
Risk discussion: All investments in securities, including the strategies discussed above, include a risk of loss of principal (invested amount) and any profits that have not been realized. Markets fluctuate substantially over time and have experienced increased volatility in recent years due to global and domestic economic events. Performance of any investment is not guaranteed. In a rising interest rate environment, the value of fixed-income securities generally declines. Diversification does not guarantee a profit or protect against a loss. Investments in international and emerging markets securities include exposure to risks such as currency fluctuations, foreign taxes and regulations, and the potential for illiquid markets and political instability. Please see the end of this publication for additional disclosures.
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