Market assessments of recession risk in the United States have increased materially since the outbreak of the Middle East conflict, driven by concerns that higher oil prices and wider geopolitical uncertainty could weigh on economic activity and corporate valuations. U.S. stock futures moved lower in pre-market Monday trade, with the S&P 500 futures down about 1.4%.
Data from the prediction market Polymarket showed the probability of a U.S. recession this year rising to 37% on Monday morning, the highest reading in three months. That compares with odds of 21% on February 25, just prior to the outbreak of the war.
Ed Yardeni, a long-standing and generally optimistic Wall Street strategist, said the sudden rise in geopolitical risk is prompting investors to reconsider both economic and market outlooks. In a note on the implications of the conflict, Yardeni warned that sharply higher oil prices could be the catalyst for a market correction even if the broader expansion remains intact.
"Spiking oil prices may precipitate a stock market correction rather than a bear market, but the latter is possible," Yardeni wrote.
Yardeni outlined a revised distribution of probable scenarios for the U.S. economy over the coming months. His firm continues to favor what it calls the "Roaring 2020s" as the most likely outcome, assigning that scenario a 60% probability. However, the firm has materially reweighted the other outcomes in response to the conflict.
- "Meltup" has been downgraded from a 20% probability to 5%.
- "Meltdown" has been increased from a 20% probability to 35% - a category that the firm now explicitly includes a 1970s-style stagflation outcome.
Yardeni noted that while historically sharp jumps in oil prices have often coincided with recessions and bear markets, the post-2022 episode following Russia's invasion of Ukraine was an exception: the U.S. economy did not fall into recession, although equities did experience a bear market.
He argues the present oil shock could pressure equities without necessarily leading to a full-blown economic downturn. Yardeni suggested that a market decline in the neighborhood of 10% to 15% is more probable than a sustained bear market, though he cautioned that the risk of a deeper, prolonged bear market would grow if investors begin to price in stagflation.
Several structural factors, Yardeni observed, make the U.S. economy less exposed to energy shocks than in earlier decades. Energy intensity has fallen as the economy has shifted away from manufacturing toward services. At the same time, gains in fuel efficiency and technological progress have reduced the degree of reliance on oil.
Domestic energy supply has also expanded substantially. U.S. crude oil output, when measured to include natural gas liquids and renewable fuels, is now near a record 24 million barrels per day. That level exceeds domestic consumption of about 21 million barrels per day and has made the country a net exporter of oil.
Despite greater domestic production and lower energy intensity, Yardeni warned that a prolonged disruption to energy markets could still change investor sentiment. If markets begin to anticipate a repeat of the stagflationary environment of the 1970s, the strategist said, the probability of a bear market would rise.
In sum, the combination of a jump in Polymarket's recession probability to 37%, a notable decline in S&P 500 futures in pre-market trading, and Yardeni's reweighting of macro scenarios underscores how geopolitical-driven energy shocks can rapidly alter market risk assessments and raise the chance of both corrections and more severe market outcomes.