Complacent investors

who assume there will be a swift resolution to the

Iran

war are making a

high-risk bet

given how bad

surging oil prices

typically end up being for stocks, according to strategists at

JPMorgan Chase & Co

.

The team, led by Dubravko Lakos-Bujas, said investors are

failing to price the potential economic damage

from soaring energy costs, despite the fact that four out of five oil shocks since the 1970s have led to recession.

“While some of the froth has been taken out of high-risk factors and speculative areas of the market, we still see complacency,” the strategists said in a note. They added that

correlation between the S&P 500 index and oil

typically turns “increasingly negative” when crude prices spike by about 30 per cent.

The market has focused on the inflationary effect of higher oil prices, but the most consequential impact in fact lies in the economic strain caused by a

prolonged shut down

of the

Strait of Hormuz

, they added. At the heart of this concern is the destruction of demand triggered by soaring oil prices.

Brent crude surged a further 10 per cent on Thursday, stretching its advance since the start of the war to more than 60 per cent, after Iranian missile strikes caused damage to the world’s largest liquefied natural gas export plant in Qatar. The S&P 500 has dropped by a modest 3.7 per cent since the conflict erupted.

JPMorgan estimates that each sustained 10 per cent increase in oil prices could shave 15 to 20 basis points off GDP growth. If oil prices hold for the rest of the year at current levels around US$110 a barrel, earnings estimates for S&P 500 companies could drop by two-five percentage points.

The pressure on profits would become even more pronounced if oil prices move higher, they added. The strategists cut their 2026 year-end target for the benchmark S&P 500 to 7,200 points from 7,500.

Bloomberg.com

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