US Market Tumbles Imminent Amid Rising Tensions with Iran: Veteran Strategist Revises Projections

US Stocks at Risk of Sharp Selloff Amid Iran Conflict

Probability of Market Meltdown Rises to 35%

Veteran strategist Ed Yardeni has updated his outlook, warning of a growing risk of a sharp selloff in US stocks this year due to the escalating war in Iran. Yardeni has raised the probability of a market meltdown to 35% for the remainder of the year, up from 20% previously. Conversely, he has slashed the odds of a meltup, a rally driven by investor enthusiasm rather than underlying fundamentals, to 5% from 20%.

Escalating Oil Prices and Interest Rate Cuts

Read also: Treasury Yields Experience Largest Increase in Two Weeks Following Release of Labor Market Data

The shift in weightings comes as oil prices surge above $100 a barrel, prompting investors to brace for a prolonged conflict in the Middle East that could send energy costs even higher. Expectations for the Federal Reserve's interest-rate cuts have already been pared back as investors come to terms with the prospect of slower growth and rising inflation simultaneously.

US Economy and Stock Market Impacted

The US economy and stock market are facing significant challenges, with the dollar emerging as the haven asset of choice and the S&P 500 Index falling 2% last week. The MSCI broadest gauge of global equities slumped 3.7%. The resilience of US stocks can be partially attributed to the country's greater energy self-sufficiency.

Market Sentiment and Expectations

Read also: US-Iran Tensions Spark Uptick in Oil Prices Amid Global Market Decline

S&P 500 futures fell more than 2% in Asian trading hours Monday, signaling fresh pressure. Hedge funds boosted short positions in US equity exchange-traded funds, and the Cboe VIX Index surged to its highest level since April's tariff turmoil. Benchmark 10-year Treasuries yields jumped six basis points as traders priced in higher inflation. Investors have pushed back expectations for the Fed's next quarter-point rate cut to September.

Probability of Robust US Growth

Yardeni's base case remains intact, with the so-called "Roaring 2020s" scenario, which envisages a decade of robust and sustainable US growth fueled by rapid productivity gains, still carrying a 60% probability through the end of the year. The outlook is better over the coming decade, with Yardeni assigning an 85% chance of a continuation of the Roaring 2020s. He also sees a 15% chance of a "stagflating 1970s redux."