JPMorgan: Investors Have Two Major Misjudgments Regarding the Iran Situation

Ask AI · Why U.S. Energy Independence Can’t Withstand Global Energy Price Transmission

The U.S. economy is not, as many investors believe, insulated from energy shocks triggered by war.

In his latest report released this Monday, Michael Cembalest, Chairman of Markets and Investment Strategy at JPMorgan Asset Management and Wealth Management, noted that around the Iran conflict there are two widely accepted assessments in the market that nonetheless contain fundamental bias:

First, the U.S. economy can withstand shocks caused by a Strait of Hormuz blockade thanks to its energy independence;

Second, the pressure on Iran to reopen the strait is enough to force the situation to ease quickly.

Cembalest believes both assessments are overly optimistic. As the report was published, Trump’s latest deadline for Iran to immediately reopen the Strait of Hormuz was set to expire on Tuesday evening. Meanwhile, the U.S. stock market’s decline in this round of conflict has been relatively limited, and some investors have interpreted this as a sign of “immunity” to the situation. But Cembalest’s analysis suggests that this calm may rest on a systematic underestimation of risk.

Misconception 1: U.S. energy independence can withstand external shocks

In the report, Cembalest directly calls out this market consensus: “The claim that the U.S. can be insulated from market impacts from a Strait of Hormuz blockade is basically wrong. The U.S.’s fossil-fuel independence doesn’t form an economic firewall the way you might imagine.”

What supports this conclusion is not theoretical reasoning, but the actual trajectory of the current market. Even though outside attention is broadly focused on the risks faced by European and Asian countries due to the blockade, the reality is that multiple refined petroleum products—and even crude oil itself—see even greater price increases in the U.S. market.

That means that even if the U.S. is a net exporter of certain fuels, the global energy prices’ large surge will still be transmitted to the United States through market mechanisms, creating a real impact on consumers and businesses.

Misconception 2: Iran will be forced to back down quickly

The second misconception lies in the fact that some market participants believe U.S. military pressure and the economic cost will push Iran to reopen the strait as soon as possible. Cembalest is skeptical of this.

In the report, he cites the view of Dina Esfandiary, a Middle East economist at Bloomberg, noting that Iran has already realized that using the global economy as a hostage strategy has a lower cost than expected and a better effect than expected. In other words, the conclusion Iran draws from the current situation is: this strategy has worked unexpectedly well.

Cembalest also lays out multiple structural factors that make it difficult for the situation to be resolved quickly. First, even if the strait reopens tomorrow, it will take time for oil production in the region to recover to pre-conflict levels. Second, the inventories of intercept missiles held by the U.S., Israel, and Gulf countries may already be becoming tight. In addition, Iran’s notable progress in drone manufacturing has greatly increased its ability to conduct asymmetric warfare. Cembalest wrote in the report: “Drone payloads may be smaller, but even a small payload can cause massive damage to aircraft, ships, and radar systems that cost far more, and the payload carried per unit cost of a drone is higher than in many missile systems.”

The U.S. Navy’s minesweeping capability is also concerning—there are currently only four aging minesweepers left in the fleet, and all of them are planned for retirement.

Hidden concerns behind stock market calm

Despite the continued buildup of the risks above, the U.S. stock market has remained relatively steady in this round of conflict, with declines clearly smaller than during historical shocks such as last year’s tariff turmoil, the outbreak of the Russia-Ukraine war in 2022, and the early period of the COVID-19 pandemic.

In an interview with MarketWatch, Stephanie Link, Chief Investment Strategist at Hightower Advisors, said the resilience of U.S. stocks “is fascinating,” attributing it to two factors: Wall Street analysts raising earnings expectations and the U.S. labor market staying solid.

However, Link also warns of tail risk: “If the conflict lasts longer than a few months, I think the impact on the market and the U.S. economy will definitely be more severe.”

At the beginning of his report, Cembalest compares the situation to Stephen King’s novel Salem’s Lot, suggesting that the direction of the current situation may diverge sharply from initial expectations—where the protagonist, driven by good intentions, goes to confront evil, only to end with the town leveled to the ground and everyone’s situation worse. Perhaps this metaphor is also Cembalest’s most concise assessment of the entire Iran situation.