Middle East Conflict Shocks Global Markets: Wall Street Strategist Warns US Stock Crash Probability Rises to 35%

Reuters Finance APP News — As conflicts in the Middle East escalate, global financial markets’ risk sentiment is rapidly heating up. Wall Street strategist Ed Yardeni warns that the risk of a significant sell-off in the U.S. stock market for the remainder of this year is clearly increasing.

In his latest market outlook report, Yardeni raised the probability of a “market crash” this year from 20% to 35%, reflecting growing investor concerns due to the intensifying geopolitical tensions.

Market Crash Probability Significantly Decreases

At the same time, Yardeni also lowered the likelihood of another market scenario—namely, a sustained rally driven by investor sentiment. He reduced the so-called “market frenzy” probability from 20% to just 5%. “Market frenzy” typically refers to a stock market rally mainly fueled by investor emotions and capital, rather than improvements in corporate earnings or economic fundamentals. In the current environment, Yardeni believes this scenario is now much less likely.

Oil Price Shock Could Be a Key Variable

The core concern in the market is energy prices. Recently, international oil prices have surged sharply due to escalating Middle East tensions, raising fears that soaring energy costs could reignite inflation pressures. If energy prices continue to rise, it could not only increase corporate costs but also weaken consumer spending, thereby dragging down economic growth.

Federal Reserve Faces Policy Dilemma

Yardeni points out that if the oil shock persists, the Federal Reserve may face an even more complex policy environment. “The U.S. economy and stock market are currently caught in Iran’s predicament,” he says. “If the oil shock continues, the Fed will face the risk of rising inflation and increasing unemployment simultaneously.” This situation could further constrain the Fed’s policy options. On one hand, rising energy prices may push inflation higher, limiting room for rate cuts; on the other hand, slowing economic growth and deteriorating employment might require more accommodative policies.

Under the dual influence of geopolitical risks and energy price volatility, market participants generally expect increased volatility in global financial markets in the near future. If the Middle East situation continues to worsen, investors may further shift into safe-haven assets and reduce allocations to risk assets.

Summary

Historically, whenever energy prices experience sharp fluctuations, global financial markets tend to enter high-volatility phases. The current rapid rise in oil prices combined with geopolitical tensions has significantly heightened concerns about economic prospects. If oil prices remain high for an extended period, it could not only boost global inflation but also weaken corporate earnings expectations, increasing downward pressure on the stock market. Therefore, in the current environment, investor sentiment may become more cautious, and market volatility could continue to expand in the coming period.