"Iran War Situation, Two Major Market Misjudgments" JPMorgan's Latest Analysis

Source: Wall Street Journal

The U.S. economy is not, as many investors believe, immune to energy shocks triggered by war.

Michael Cembalest, Chairman of Market Strategy and Investment Strategy at JPMorgan Asset & Wealth Management, pointed out in a recent report released this Monday that there are two widely accepted but fundamentally flawed assumptions circulating in the market regarding the Iran conflict:

1. The U.S. economy can withstand the impact of the Strait of Hormuz blockade due to energy independence;

2. The pressure for Iran to reopen the strait will be enough to quickly de-escalate the situation.

Cembalest believes both assumptions are overly optimistic.

At the time of this report’s release, the latest deadline for Trump’s demand for Iran to immediately reopen the Strait of Hormuz will expire on Tuesday evening. Meanwhile, U.S. stock markets have experienced relatively limited declines amid this round of conflict, which some investors interpret as a “immune” signal from the market.

However, Cembalest’s analysis shows that this calm may be based on a systemic underestimation of risks.

Misconception 1: U.S. energy independence can withstand external shocks

Cembalest directly addresses this market consensus in the report: “The claim that the U.S. can be immune to the impact of a Strait of Hormuz blockade is fundamentally wrong. The U.S. fossil fuel independence does not, as you might think, constitute an economic firewall.”

What supports this conclusion is not theoretical deduction but current market realities. Although the outside world is generally focused on the risks faced by European and Asian countries due to the strait blockade, the actual situation is that prices for various refined petroleum products and even crude oil itself have risen more significantly in the U.S. market.

This means that even if the U.S. is a net exporter of certain fuels, a sharp increase in global energy prices will still transmit through market mechanisms into the U.S., causing tangible impacts on consumers and businesses.

Misconception 2: Iran will be forced to make quick concessions

The second misconception is that some market participants believe that U.S. military pressure and economic costs will compel Iran to reopen the strait quickly. Cembalest remains cautious about this.

He cites Bloomberg Middle East economist Dina Esfandiary in the report, noting that Iran has realized that using the global economy as a hostage is less costly and more effective than expected. In other words, Iran’s conclusion from the current situation is that this strategy has unexpectedly worked.

Cembalest also lists multiple structural factors that make a quick resolution difficult. First, even if the strait reopens tomorrow, it will take time for regional oil production to recover to pre-conflict levels. Second, the stockpiles of intercept missiles held by the U.S., Israel, and Gulf countries may already be strained. Additionally, Iran’s significant progress in drone manufacturing has greatly enhanced its asymmetric warfare capabilities.

He writes in the report: “Although drone payloads are relatively small, they can cause massive damage to much more expensive aircraft, ships, and radar systems with just a small payload, and the payload carried by drones exceeds that of many missile systems in cost-effectiveness.”

The U.S. Navy’s mine-clearing capabilities are also a concern—currently, only four old minesweepers remain in the fleet, all scheduled for decommissioning.

Hidden concerns behind market calm

Despite these ongoing risks, U.S. stock markets have performed relatively well in this round of conflict, with declines significantly smaller than those during the tariff disputes last year, the Russia-Ukraine conflict in 2022, and the early stages of the COVID-19 pandemic.

Stephanie Link, Chief Investment Strategist at Hightower Advisors, told MarketWatch that the resilience of U.S. stocks is “fascinating,” attributing it mainly to Wall Street analysts raising earnings forecasts and the U.S. labor market remaining robust.

However, Link also warned of tail risks: “If the conflict lasts more than a few months, I believe the impact on markets and the U.S. economy will be much more severe.”

Cembalest begins his report with a metaphor from Stephen King’s novel “Jerusalem’s Lot,” implying that the current situation’s trajectory may differ greatly from initial expectations—where the protagonist, with good intentions, goes to confront evil, only for the town to be razed and everyone’s situation to worsen. This metaphor perhaps encapsulates his most concise judgment on the entire Iran situation.