Iran War Risks Push US Stock Market Meltdown Probability to 35%

Escalating tensions in Iran are significantly increasing the risk of a sharp selloff in US stocks, according to veteran market strategist Ed Yardeni. The conflict is disrupting global markets and fueling concerns about rising inflation, potentially leading to a market “meltdown” similar to the early 2000s crash.

Increased Meltdown Probability

Yardeni has raised the probability of a US stock market meltdown to 35% for the remainder of the year, a substantial increase from his previous estimate of 20%, according to a note to clients on Monday . Conversely, he has slashed the odds of a “meltup”—a rally driven by investor enthusiasm rather than fundamentals—to just 5% from 20%.

Oil Prices and Inflation

The reassessment comes as crude oil prices have surged past $100 a barrel , and investors brace for a prolonged conflict in the Middle East that could further drive up energy costs. This surge in oil prices raises the risk of stagflation – a combination of high inflation and slowing economic growth – a scenario considered particularly damaging to the economy.

Federal Reserve Complications

Higher oil prices are also complicating the outlook for Federal Reserve interest rate cuts. Expectations for rate cuts have been pared back as investors anticipate slower growth and rising inflation simultaneously . Yardeni noted, “The US economy and stock market are stuck between Iran and a hard place currently. So is the Fed.”

Stagflation Risk

Yardeni now estimates a 15% chance of a “Stagflating 1970s Redux,” a repeat of the stagflation experienced in the 1970s, a scenario that was not previously on his radar.

Potential Market Correction

While a full-blown bear market isn’t certain, Yardeni suggests a stock market correction of 10% to 15% is likely due to high oil prices. However, he also maintains a 60% probability of a “Roaring 2020s” scenario, where stock prices continue to climb alongside productivity gains .

Dollar Strength and Equity Performance

Amid the uncertainty, the US dollar has strengthened as investors seek safer assets. The Bloomberg Dollar Spot Index has risen nearly 2% since the conflict began. US equities have fared slightly better than global markets, with the S&P 500 declining about 2% last week, compared with a 3.7% drop in the MSCI World Index .