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As hostilities broke out in the Middle East, markets initially showed resilience, supported by the expectation that the disruption could be short-lived—similar to past episodes—amid improving global economic data. However, after roughly three weeks, that resilience has started to fade as the conflict weighs more heavily on market sentiment and risk appetite.
While the conflict’s trajectory remains uncertain, the article highlights three near-term developments that could prompt a more dramatic market response: damage to energy infrastructure, loss of American lives, and the prospect of U.S. “boots on the ground.” It notes that American casualties have been minimal and that boots on the ground still appears to be a low-probability scenario at this time. Still, some energy infrastructure damage has already occurred, contributing to additional market weakness.
The article frames the current market move as a valuation reset that has removed some excess. It states that the S&P 500 has dipped below 20 times earnings for the first time since tariff-related market weakness. It also says that, across markets, price-to-earnings ratios have fallen by about two points. By region, Europe is back below 15 times, while emerging markets have declined to around 12 times. The piece emphasizes that it is not claiming markets are “cheap,” but argues that the pullback has made valuations more compelling.
Beyond valuations, the article discusses “correction watch” indicators designed to detect oversold conditions or capitulation. It says not all indicators are flashing a clear “buy” signal, but enough are improving to warrant attention.
It notes that the VIX is higher, but not enough to indicate capitulation. For the S&P 500, RSI has fallen to 32, which the article describes as bullish as an oversold signal. It also cites sentiment from the American Association of Individual Investors survey from this week, reporting 30% bullish and 52% bearish, and states that a spread of over 20 is typically considered a bullish signal.
Corporate spreads have risen from very low levels, though the article says they are not at capitulation levels. It also points to positive bond/equity correlations, attributing this to a potential inflation impulse from higher energy prices. In a more entrenched risk-off scenario, the article says yields would typically fall, which would make this signal less encouraging.
Market breadth is described as weakening: the percentage of S&P 500 companies trading above their 50-day moving average in a bull trend has fallen to 28%, which the article says is approaching capitulation levels.
Option indicators are described as elevated but not at capitulation levels. The article references skew (the cost of tail insurance) and the put-to-call ratio. It also says currency signals are sending mixed signals, while sector divergence remains supportive, with defensives winning—an effect the article says has been in place for several weeks.
The article concludes that some correction signals are beginning to flash “buy,” but most are not yet fully aligned. It cautions that waiting for all indicators to match can cause investors to miss opportunities. It also states that, given the firm’s more cash-heavy and defensive starting position, it may be easier to act opportunistically during periods of market stress.
This report is authored by Craig Basinger, Chief Market Strategist at Purpose Investments Inc.
Sources: Charts are sourced to Bloomberg L.P., Purpose Investments Inc., and Richardson Wealth unless otherwise noted.
The author or his firm may hold positions in mentioned securities. Any opinions expressed herein are solely those of the authors, and do not in any way represent the views or opinions of any other person or entity.
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