"Three Great Beliefs" Supporting US Stocks: War Won't Last Long, Private Credit Won't Trigger a Crisis, Trump Will Always Save the Market

Since the outbreak of the Iran conflict, global stock markets have come under pressure, but the selling intensity is far less than similar shocks in history. Three deeply rooted beliefs support investors in holding steady: the war won’t last long, private credit won’t trigger a systemic crisis, and policymakers will eventually step in to support the market.

Since the conflict began, the S&P 500 has fallen more than 3%, while the European Stoxx 600 has declined slightly more but has stabilized. Notably, less than 20% of stocks in developed markets are technically oversold, and profit-taking remains limited, with small-scale buying on dips even last week.

Bank of America strategists led by Michael Hartnett attribute this phenomenon to market positioning still leaning bullish—the consensus believes the war won’t last long, private credit doesn’t pose systemic risk, and policymakers have historically come to Wall Street’s rescue.

However, Barclays strategists warn that market nerves are increasingly strained. “Investors still believe in the existence of Trump’s put options, which is why global stock declines are less severe than during previous oil shocks,” they say. “But the longer the Strait of Hormuz remains blocked, the more pronounced the stagflation characteristics will become.” This week, the Federal Reserve, European Central Bank, Bank of Japan, and Bank of England will hold meetings, and with oil prices hovering around $100 per barrel, their policy statements will be closely scrutinized.

Why hasn’t the sell-off arrived yet?

From a market structure perspective, this round of risk aversion shows clear selectivity. Bank of America notes that capital outflows are mainly concentrated in high-yield bonds, emerging market debt, and financial stocks, while large-cap positions have not yet shown enough ‘bear market panic’ to trigger contrarian buy signals.

BOA believes that an adjustment typically requires three conditions: oversold assets bottoming out, overbought assets being sold off, and safe-haven assets no longer being in demand. “This sequence is unfolding, meaning that once policymakers respond, selling pressure should ease quickly,” the team states.

Meanwhile, the sharp rise in hedging demand also reflects deep investor anxiety. Liquidnet Alpha cross-asset sales expert Anthony Benichou points out that the VIX skewness relative to at-the-money volatility is near historical highs, indicating the market is paying a hefty premium for tail risks— a classic sign of extreme pessimism. However, he also warns that forced deleveraging and systemic capital flows could still cause violent swings in either direction.

Policy responses are a key variable

The current situation shows a clear bifurcation: if oil prices spike sharply and then quickly fall back, inflation pressures will be seen as temporary, and the impact on growth will remain mild—Barclays strategists believe that in this scenario, central banks might temporarily hold off on addressing price increases, ultimately benefiting risk assets. Conversely, if inflation and growth both come under pressure and recession risks rise, equities will face greater downside vulnerability.

Political pressures are also significant. The impact of war on inflation and living costs may push the U.S. government to seek a quick resolution before midterm elections. Meanwhile, central banks’ policy space is shrinking—interest rate hike expectations in Europe are fully priced in the swap market, the UK rate cut expectations have been withdrawn, and the U.S. rate cut outlook has also begun to diminish.

“We are now in a phase where investors are assessing possible policy responses,” says Benoit Peloille, Chief Investment Officer at Natixis Wealth Management. “If the conflict persists longer, central banks will respond in some form, although we are not there yet.”

Risk warning and disclaimer

Market risks are inherent; investments should be cautious. This article does not constitute personal investment advice and does not consider individual users’ specific investment goals, financial situations, or needs. Users should consider whether any opinions, views, or conclusions herein are suitable for their particular circumstances. Invest at your own risk.