Like clockwork, Wall Street strategists and investors are turning to a traditional playbook that says stock-market dips triggered by sudden geopolitical flareups are almost always good buying opportunities.
There's one big asterisk to the strategy this time around, however: The potential for a prolonged US and Israeli confrontation with Iran to send oil to the neighborhood of $100 a barrel for some time, choking off the consumer-driven US economy.
While a jump to as high as $100 is currently not the consensus call among oil analysts, it's a risk that equity bulls are now considering.
A prolonged surge in energy costs would not only threaten consumer spending, it would also potentially reignite inflation and send interest rates back up — a scenario that unfolded in real time Monday as U.S. yields spiked higher when Treasurys failed to play their traditional role of safe haven in times of acute geopolitical stress.
"Inflation concerns may start to bubble if there is an extended period of higher oil prices," Jay Woods, chief global strategist for Freedom Capital Markets, wrote in a note. "That will be an enormous and unexpected tax on the consumer, an issue the Fed doesn't need to grapple with while under presidential pressure to lower rates."
In the first day of trading following the assault on Iran and its subsequent retaliation, the dip in equities proved to be short lived: The S&P 500 slid as much as 1.2% shortly after the open of U.S. exchanges, before recovering losses to trade little changed by midday.
West Texas Intermediate crude oil jumped as much as 12% to $75.33 a barrel, before paring gains in half to trade near $71. Brent crude was up 7.4% at $77.85 a barrel.
Yet the conflict in the Middle East is hitting a stock market that was already trading cautiously due to concerns about the potential disruption that artificial intelligence poses to a wide variety of companies, as well as accompanying cracks appearing in credit markets.
Oil prices have historically only troubled stocks above the $100 a barrel level, according to Bloomberg Intelligence strategists.
The S&P 500 has fallen an average 1.6% in the year following periods when oil was above $100 since 1983, the strategists added, citing a level some analysts are penciling in should the Strait of Hormuz remain closed for an extended period.
"It's the only price tranche we looked at that is associated with negative forward returns, aside from it being some psychological level," said BI strategist Nathaniel Welnhofer.
Morgan Stanley equity strategists led by Michael Wilson are also pointing at $100-a-barrel crude, or a 75%-100% surge in prices on a year-over-year basis, as presenting a possible bear case for stocks.
They added that the economy would need to be in a late-cycle backdrop to boost the probability of that scenario, and the strategist wrote that they believe "we're in an early cycle environment today as the earnings recovery accelerates."
There's also reason to believe that the tech-driven economy of the U.S. — currently the largest oil producer in the world — is in a better position to weather global oil price shocks than in decades past. And so far, the spike in prices has not brought oil anywhere near the $100 level that equity bulls worry about.
"In today's American economy, spikes in oil prices do not present the same significant downside risk to top-line economic growth or inflation as they did a half century ago," said Joseph Brusuelas, chief economist at RSM U.S., who added that he believes oil would need to reach the $120-$130 range before it caused a pullback in consumer spending.
"For now, early price action across energy markets simply does not appear to present any material risk to U.S. growth or inflation outlooks," he added.
Much depends on how long the conflict lasts, and how long the transport of crude is disrupted in the Strait of Hormuz, through which an estimated one-fifth of the oil consumed globally passes.
A long closure of the strait could echo the crude shocks experienced during the 1973 Arab oil embargo and the 1979 Iranian revolution, according to BI.
The 1973 embargo led to a stagflationary recession that saw the S&P 500 fall an annualized 29%, the strategists added, but the second crisis was accompanied by an 11.3% annualized gain in the S&P 500 despite a recession in 1980.
U.S. Defense Secretary Pete Hegseth rejected the idea of an "endless" war with Iran as airstrikes continued for a third day on Monday. President Donald Trump told CNN the operation is "a little ahead of schedule," having thought it would last for four weeks.
For the near future, anyway, traders in the global equity markets will focus on a 100-mile-long chokepoint that connects the Persian Gulf with the Gulf of Oman.
"If Iran were to deploy mines, fast attack craft, or drone swarms to restrict commercial transit — even partially, even temporarily — the impact on energy prices would be severe and immediate," Adrian Helfert, chief investment officer of multi-asset strategies at Westwood Management, said in a note.
"This is the scenario we are watching most closely, because it is the one that transforms a geopolitical event into a direct economic impact," Helfert added.
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