Geopolitical tensions are unsettling, but markets tend to react more strongly to economic crises and recessions. Historically, the S&P 500 index has often recovered relatively quickly following military conflicts. However, the conflict in the Middle East is different, as it may slow the US economy. Let’s discuss this topic and make a trading plan.
The article covers the following subjects:
Major Takeaways
- The US has a geographical advantage.
- Investors’ expectations for the TACO strategy have not materialized.
- Surging oil prices will hurt the US economy.
- Selling the S&P 500 with targets at the 6,100 and 6,000 levels is a viable strategy.
Monthly Fundamental Forecast for S&P 500
Time will sort everything out. Markets have finally moved past two misconceptions: that the conflict in the Middle East would be short-lived, and that the US president could fully control the situation. These illusions previously allowed investors to employ the TACO strategy, which gained popularity after Liberation Day in April, when the S&P 500 initially dropped 12% before rebounding 37% by year-end. This time, however, the circumstances appear different.
The TACO trade reflects patterns often seen in market reactions to geopolitical events. According to Deutsche Bank, in the 30 major armed conflicts since 1939, the S&P 500 experienced an average decline of just 4%, with rebounds occurring quickly. By contrast, other historical episodes were far more severe: the Russian stock market was devastated following the 1917 revolution and World War I, while Japanese stock indices fell by 96% in real terms after World War II.
S&P 500’s Response to Geopolitical and Economic Developments
Source: Wall Street Journal.
The United States is generally far removed from the epicenters of geopolitical upheaval, and historically, its economy has benefited from conflicts abroad. By this logic, the Middle East conflict was not expected to be an exception. As a net exporter of energy products, the US economy could continue growing.
However, the longer the standoff persists, the greater the risk of a shock scenario, such as Iran’s projection that Brent crude could reach $200 per barrel. In that case, US inflation would accelerate sharply, forcing the Fed to raise already-elevated interest rates. Higher rates would slow economic growth, increase corporate borrowing costs, and place additional pressure on the labor market.
Earnings Forecasts for S&P 500 Companies
Source: Bloomberg.
In this context, the upward revision of S&P 500 earnings forecasts for the first quarter—from 10.9% before the Middle East conflict to 11.9% during it—may seem surprising. Morgan Stanley even projects a 20% increase over the next 12 months, a level typically only observed after recessions due to the low-base effect.
This appears to be largely driven by investors’ expectations for the conflict’s duration. For some time, the standoff was seen as short-term, with a rapid resolution anticipated to propel the S&P 500 higher, similar to the sharp rally following the US tariff-related rebound in spring 2025. However, JP Morgan cautions that if Brent crude consolidates above $110 per barrel, earnings estimates for companies in the broad stock index could be cut by roughly 5 percentage points, with significant and lasting consequences.
Monthly Trading Plan for S&P 500
It seems unlikely that the conflict in the Middle East will be resolved in the near term. Coupled with a slowing US economy, rising inflation, the Federal Reserve’s shift from holding rates steady to potential rate hikes, and downward revisions to corporate earnings forecasts, these factors suggest a continued correction in the S&P 500 toward 6,100 and 6,000. Since the index has reached its targets of 6,500 and 6,400, short positions can be considered.
This forecast is based on the analysis of fundamental factors, including official statements from financial institutions and regulators, various geopolitical and economic developments, and statistical data. Historical market data are also considered.
Price chart of SPX in real time mode
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