US stock markets hover above critical support levels as Middle East war enters second month
Investors and traders have been on tenterhooks over the past few weeks but are getting increasingly concerned as the war in the Middle East enters its first month.
Two scenarios dominate market thinking
One scenario is escalation, where the US deepens its involvement, potentially extending from naval and air operations to a more direct military presence. Markets would likely interpret this as a significant step-up in geopolitical risk, with oil prices pushing higher still on fears of increased supply disruption, safe-haven flows into the US dollar and Treasuries, and global equities – particularly in Europe – coming under additional pressure.
Defence stocks would likely outperform, while sectors sensitive to energy costs and global trade could lag but overall stock indices would likely decline further.
The alternative scenario is de-escalation, where the US signals restraint, either through diplomacy or by limiting its military engagement. In that case, risk appetite would likely improve, with equities stabilising or rebounding, oil prices easing back, and volatility declining.
Investors would view this as reducing the tail risk of a broader regional conflict, allowing macro factors such as inflation and central bank policy to regain prominence in driving markets.
Oil normalisation timeline remains extended
Even if a ceasefire were to be agreed and if the Strait of Hormuz were to fully reopened, it would likely take several days to a few weeks for normal shipping flows to resume, given the backlog created. Tankers delayed or rerouted would first need to be sequenced back through the chokepoint, while ports and terminals work through congestion on both loading and discharge sides.
Vessels already anchored or idling nearby could begin transiting within days, but cargoes that had been diverted or postponed would extend the normalisation period. In practice, while some oil and Liquefied natural gas (LNG) shipments could reach their destinations within a week of reopening, a full clearing of queues and return to typical transit schedules would more realistically take several weeks and perhaps even months.
This is making it likely that the oil price – currently trading around 40% higher than when the war began – will remain high.
Inflation risks complicate central bank policy
Elevated oil prices are complicating the outlook for central banks, as they risk re-igniting inflation just as policymakers were preparing to ease policy. Higher energy costs feed directly into headline inflation and indirectly into core prices via transport, production, and input costs, raising the risk of a renewed inflationary impulse.
As a result, markets have already scaled back expectations for rate cuts in 2026, with central banks likely to adopt a more cautious, “higher for longer” stance to ensure inflation remains anchored. Some, like the European Central Bank (ECB), are now expected to hike rates and when it comes to the US Federal Reserve Bank (Fed), markets are now pricing in a 51% chance of a Fed rate hike by October.
In this environment, persistently high oil prices act as a tightening force in themselves, delaying monetary easing and increasing the risk that inflation proves stickier than previously anticipated. The Bank of England (BoE) faces similar dilemmas.
S&P 500 approaches critical support
At present global stock indices seem to have found temporary support at this week’s lows. Since these were made in the vicinity of the October to November major support zones, a bounce may materialise from current levels.
If a fall through the Monday 20 March lows were to occur, though, the technical picture would become far more negative and may turn the recent sell-off into a full-blown bear market.
The daily S&P 500 chart illustrates this point with a fall and daily chart close below the 20 March low at 6,474 probably leading to a medium-term top being formed.