Stocks moved lower as crude oil traded back around $100 a barrel, and Yardeni Research said in a Friday note that investors may be starting to price in the possibility of a lengthier conflict in the Middle East.
The firm cautioned that the market appears to be incorporating a scenario in which "the war won't be short and that the Strait of Hormuz may remain effectively closed for some time." Yardeni pointed to ongoing combat and cited reporting that Israeli officials see Iran's regime as unlikely to fall soon.
Market breadth reflected the growing unease. Yardeni noted that the S&P 500 is down 4.4 percent from its January high and the Nasdaq has slipped 6.4 percent since its October record. The research shop reiterated its view that a 10 to 15 percent correction remains a plausible outcome for equities, and said rising government bond yields are adding to the headwinds.
On yields, Yardeni highlighted a notable move higher in the 10-year Treasury rate, which climbed from 3.95 percent on February 27 to 4.26 percent. The firm argued that higher yields are compounding pressure on equities as investors re-evaluate valuations amid tighter financial conditions.
Yardeni also expressed concern that the market is beginning to price in stagflationary risks. The firm said the recent decline in inflation could reverse if energy, food and airfare costs rise as a result of the conflict, a dynamic that would complicate the economic outlook.
At the same time, Yardeni reviewed pre-war economic indicators that showed some resilience - including strong unemployment claims data and a narrowing U.S. trade deficit. But the research shop warned that recession risks would increase the longer the war persists.
Sentiment gauges have deteriorated amid the conflict. Yardeni cited a sharp fall in measures such as the Bull/Bear Ratio and suggested that contrarian investors may be drawing closer to a market bottom. In its note, Yardeni concluded: "The stock market may be getting closer to the bottom from a contrarian perspective. The bottom will be made when the Strait is open again for safe passage. That may take a while longer and push the BBRs still lower for the next few weeks."
Overall, Yardeni's analysis links higher energy costs and rising yields with a less benign outlook for both inflation and growth if the conflict endures, leaving markets focused on the duration of the geopolitical shock and its implications for prices and economic momentum.