JPMorgan Chase & Co (NYSE:JPM, XETRA:CMC)'s global equity strategists have highlighted that US stocks have remained relatively resilient despite a sharp surge in oil prices, but cautioned that markets may be underpricing the risks tied to supply shocks and demand deterioration.
As such, the firm lowered its 2026 year-end S&P 500 target to 7,200 from 7,500.
The analysts observed that since the start of Operation Epic Fury, the S&P 500 has been relatively resilient, down only about 3%, even as oil prices have surged by over 40%, alongside a repricing of Federal Reserve expectations.
The analysts added that “as is often the case in initial waves of global volatility, S&P 500 benefits from flight-to-quality and defensive flows,” supported by the safe-haven status of US assets and the market’s tilt toward low-volatility and quality growth factors.
However, beneath the surface, JPMorgan suggested positioning remains stretched. “We believe investors have been mostly hedging rather than de-risking, with gross leverage still near highs,” they wrote. They believe that despite some unwinding in speculative areas, “we still see complacency.”
The firm also highlighted what it sees as a key risk in current market assumptions. JPMorgan wrote that “the market is pricing in a quick end to the Middle East conflict and reopening of the Strait,” while assigning “a low probability to a potential demand hit,” calling this “a high-risk assumption.”
Historically, the bank’s analysts noted, supply-driven oil shocks have often led to economic downturns. “Four out of five oil shocks have led to a recession since the 1970s,” they wrote, pointing to rising production shut-ins and estimates that crude supply cuts could approach 12 million barrels per day, or about 11% of global production.
JPMorgan argued that the main risk is not just inflation, but the impact on demand. “The bigger and more consequential question is the potential negative transmission mechanism into demand if the Strait does not reopen,” they wrote. Further, the adjustment mechanism may involve “GDP, demand, and revenues adjust lower through forced demand destruction.”
The bank estimates that each sustained 10% increase in oil prices could yield a 15 basis points to 20 basis point hit to GDP and that if oil prices remain around current levels, “consensus EPS estimates could adjust lower by 2% to 5%.”
The impact of the shock is “less about earnings contraction and more about investor sentiment resulting in a haircut to multiples,” they wrote.
At the same time, JPMorgan pointed to a more fragile broader backdrop, citing concerns around private credit, slowing momentum in AI-related themes, and constrained consumers, while noting the Federal Reserve is limited in its ability to ease due to inflation risks.