Wall Street View: JPMorgan Cuts S&P 500 Target Due to Middle East Supply Risks

Investing.com - JPMorgan strategists have significantly lowered their year-end target for the S&P 500 index, warning that the upside potential of risk assets is increasingly constrained by the escalation of Middle East conflicts.

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Led by Fabio Bassi, the firm’s strategy team has revised the benchmark index forecast from 7,500 to 7,200 points, citing the de facto closure of the Strait of Hormuz as a serious supply shock that could suppress global economic growth and trigger a new round of inflation.

“Valuation compression” threat

This downgrade comes amid intense pressure on the stock market, with the SPDR® S&P 500® ETF Trust (NYSE:SPY) declining for the fourth consecutive week, marking the longest losing streak in over a year.

Strategists believe the main risk facing the stock market is “valuation compression,” as investors are forced to reassess growth and liquidity amid oil prices reaching $110 per barrel.

According to Bassi, if crude oil prices remain in triple digits through the end of the year, it could lead to a 2% to 5% reduction in consensus EPS for the S&P 500.

While the new target still implies an 11% increase from current levels, JPMorgan warns that the market has not fully priced in the risk of a deeper economic contraction.

Historically, four out of five major oil shocks since the 1970s have ultimately led to recessions. The firm believes this precedent is being overlooked as traders face multiple headwinds, including private credit write-downs and concerns over disruptive AI developments.

Hedging against long-term supply shocks

JPMorgan’s shift in sentiment reflects a broader move among institutional investors toward risk aversion. Strategists now advise maintaining investments but with strong “downside hedges,” especially as the joint US and Israel strikes on Iran show no signs of an immediate resolution.

The firm notes that this year’s mild pullback may not fully reflect the reality of “higher and more sustained” energy prices, which are beginning to erode corporate profit margins.

Central bank intervention remains uncertain, but stagflation—characterized by stagnant economic activity and high fuel costs—has significantly narrowed the path to a “soft landing.”

With the Strait of Hormuz still a hotspot for maritime instability, JPMorgan warns that an “energy tax” on US consumers and industrial sectors will continue to be a major drag on stock valuations for the rest of 2026.