Morgan Stanley believes the US equity market is about to witness more sell-off events as the war in Iran rages on.
In a new episode of the bank’s Thoughts on the Market podcast, Morgan Stanley global head of Fixed Income Research Andrew Sheets says the US began 2026 on a high note with a solid jobs report, moderating inflation and the Fed poised to lower interest rates.
But Sheets notes that President Trump’s decision to strike Iran suddenly reversed the trajectory of stocks and gold.
“In a moment, the Iran conflict and the subsequent risk of an oil price shock flipped almost every single one of those storylines on its head. Now, oil prices rose, and the prices for metals, transports, cyclicals and financial stocks all fell.
Equities in Europe and Asia, regions that rely heavily on importing oil, underperformed. The US dollar rose as investors sought a safe haven. Inflation jumped following oil prices. The yield curve flattened on that higher inflation as we and many other forecasters adjusted our expectations for what central banks would do.
And, as it happens, the last US jobs report was pretty bad.”
According to Sheets, the sudden shift in market direction suggests that many investors bought stocks and precious metals at higher prices. The analyst warns that these investors are now trapped and will likely unload their holdings in the coming weeks, indicating that a reversal to the upside is not yet in sight.
“If the Iran conflict ends and oil resumes flowing through the Strait of Hormuz, it’s very possible that this story could once again swing back. But until it does, the speed at which this momentum has flipped means that, almost by definition, many investors have been caught off guard and left poorly positioned. If you couple that with the challenge of diversifying in this new environment, where the prices for stocks, bonds, and even gold have all been moving in the same direction, the path of least resistance for investors may be to continue to reduce their exposure to ride out the storm, driving further near-term weakness. Unfortunately, that could make for an uncomfortable few weeks.”
At time of publishing, the S&P 500 is trading at 6,506, and gold is worth $4,497.
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