One of Wall Street’s most closely followed strategists has raised the probability of a significant US market selloff to 35% for the remainder of the year, up from a previous estimate of 20%, pointing to the escalating conflict in Iran as the primary driver of the revision. At the same time, the odds of a market meltup driven by investor enthusiasm rather than economic fundamentals have been slashed to just 5%, down from 20% previously.
The shift reflects a rapidly changing landscape. Oil prices have surged above $100 a barrel, investors are bracing for a prolonged Middle East conflict, and expectations for Federal Reserve interest rate cuts have been pulled back as markets begin pricing in the uncomfortable combination of slower growth and rising inflation. The strategist described the current moment as fast-moving and noted that the US economy and the Fed are both caught between difficult and competing pressures.
If the oil shock persists, the concern is that the Fed’s dual mandate of managing inflation and supporting employment could be pulled in opposite directions at the same time, with energy costs pushing prices higher even as economic momentum weakens.
How markets have responded so far
The dollar has been the clear haven asset of choice since the conflict began, gaining nearly 2% against a broad basket of currencies. US stocks have held up better than global peers but have not been immune. The S&P 500 fell roughly 2% last week while a broad index of global equities dropped nearly 4% over the same period.
The relative resilience of American markets has been attributed in part to the country’s greater energy self-sufficiency compared to regions like Asia, where exposure to Middle Eastern oil supply is considerably higher. Concerns about artificial intelligence spending and potential business disruption had also already cooled some of the momentum in US equities heading into the conflict, leaving less froth to unwind.
S&P 500 futures fell more than 2% during Asian trading hours before recovering some ground as finance ministers from the Group of Seven nations prepared to discuss a possible coordinated release of oil reserves. Volatility gauges surged to their highest levels since the tariff-driven turbulence of April 2025. The yield on the 10-year Treasury ticked higher as traders priced in a more persistent inflation outlook.
Rate cut expectations pushed further out
Investors have now pushed back their expectations for the next Federal Reserve rate cut to September. Just weeks ago, before the conflict erupted, markets had fully priced in a move by July. Some corners of the bond market are now pricing in the possibility that the Fed does not cut rates at all in 2025. If inflation expectations become unanchored by a prolonged oil shock, a more aggressive repricing of rate expectations is possible.
The base case still holds, for now
Despite the upgraded risk assessment, the strategist’s broader long-term outlook remains intact. A scenario envisioning a decade of robust US growth fueled by rapid productivity gains still carries a 60% probability through year-end and an 85% probability over the coming decade. A stagflationary outcome reminiscent of the 1970s is assigned a 15% probability over that longer horizon.
The warning embedded in that framework is significant. If investors begin expecting stagflation in earnest, a sustained bear market becomes considerably more likely. For now the base case holds, but the margin for error has narrowed, and the Iran war has made a difficult balancing act for markets and policymakers considerably harder.
