Antonio Gabriel, a global economist at Bank of America Securities, stated that investors may be underestimating the extent to which a conflict involving Iran could disrupt the global economy.
"While the possibility of a swift resolution certainly exists, we believe the likelihood of the conflict extending into the second quarter is equally significant, and the potential for a protracted war cannot be ruled out," Gabriel wrote in a report on Monday. "However, markets appear to be treating this largely as a temporary shock."
The S&P 500 is only down about 4% from its record high, which Gabriel suggests indicates relative investor optimism about the war—despite inflation concerns prompting traders to scale back their bets on the magnitude of Federal Reserve interest rate cuts this year.
"We believe the market is primarily focused on inflation, while a more disruptive scenario for global growth may be underestimated," Gabriel wrote.
With the war's trajectory highly uncertain, Wall Street is scrambling to assess how the conflict will ultimately impact equity markets. Currently, strategists from Goldman Sachs and Morgan Stanley remain bullish on U.S. stocks, citing earnings growth and more reasonable valuations as supportive factors. Stephen Parker, Co-Head of Global Investment Strategy at J.P. Morgan Private Bank, however, stated that the market's view of the war is "somewhat complacent."
Meanwhile, Helima Croft, Head of Global Commodity Strategy at RBC Capital Markets, has increased her estimates for the duration of the conflict and its impact on oil prices.
"Expanded U.S. war objectives, coupled with Iran's asymmetric warfare capabilities and desire to restore deterrence, could prolong the conflict into the spring," she wrote. "We believe that if the war continues for another three to four weeks with little progress on maritime security, we will surpass the oil price peak of $128 per barrel reached during the 2022 Russia-Ukraine conflict, and if it continues for several more months, prices will exceed the 2008 peak of $146 per barrel."
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