The Three Core Beliefs Supporting the US Stock Market: The War Won't Last Long, Private Credit Won't Trigger a Crisis, and Trump Will Always Rescue the Market

Since the outbreak of the Iran war, global stock markets have faced pressure, but the selling pressure has been far less severe than during similar historical shocks. What keeps investors on the sidelines are three deeply entrenched beliefs: the war won't drag on, private credit won't trigger a systemic crisis, and policymakers will step in to support the market eventually.

Since the start of the conflict, the S&P 500 index has fallen by more than 3%, while the Euro Stoxx 600 index has dropped slightly more, but has since stabilized. It's worth noting that in developed markets, less than 20% of stocks are technically oversold, and the extent of profit-taking remains limited; last week even saw some minor dip-buying activity.

Bank of America strategists, led by Michael Hartnett, attribute this phenomenon to a market positioning that remains skewed toward the bullish side—the consensus being that the war won't last long, private credit doesn't pose systemic risks, and policymakers have a history of coming to Wall Street's rescue.

However, Barclays strategists warn that market nerves are growing increasingly tense. "Investors still believe in the existence of the Trump put, and this is why global stocks haven't fallen as much as in previous oil shocks," they stated. "But the longer the Strait of Hormuz remains blocked, the more stagflationary the market's characteristics will become." This week, the Federal Reserve, European Central Bank, Bank of Japan, and Bank of England are all holding policy meetings. With oil prices hovering around $100 per barrel, market participants will scrutinize statements from central banks closely.

Why the Sell-off Has Yet to Arrive

From a market structure perspective, this round of risk aversion has been highly selective. The Bank of America team points out that outflows have been mainly concentrated in high-yield bonds, emerging market debt, and financial stocks, while positioning at the large-cap level has yet to trigger a 'bear market panic' that would invite contrarian buying signals.

Bank of America believes that a correction usually requires three conditions to be met: oversold assets bottoming out, overbought assets being sold off, and safe-haven assets falling out of favor. "This sequence is unfolding, which means that once policymakers respond, selling pressure should ease quickly," the team stated.

Meanwhile, a sharp rise in hedging demand also reflects deeper investor anxiety. Anthony Benichou, Liquidnet Alpha cross-asset sales specialist, pointed out that VIX skew relative to at-the-money volatility is near historic highs, which means the market is paying a hefty premium for tail risk—this is a classic sign of extreme pessimism. However, he also warns that forced deleveraging and systematic capital flows may still trigger intense volatility in both directions.

Policy Response Becomes a Key Variable

The current situation is showing a clear binary divergence: if oil prices rise sharply and then quickly retreat, inflationary pressures will be seen as temporary, and the impact on growth will remain moderate—Barclays strategists believe that in this scenario, central banks may choose to temporarily overlook price increases, ultimately benefiting risk assets. On the other hand, if both inflation and growth come under pressure and the economy faces recession risks, the stock market will become more vulnerable to downside risks.

Political pressure is also not to be underestimated. The impact of war on inflation and living costs could force the U.S. government to seek a quick resolution to the conflict before the midterm elections. Meanwhile, central bank policy room is narrowing—swap markets have fully priced in rate hikes in Europe, all UK rate cut expectations have been withdrawn, and U.S. rate cut expectations are also being scaled back.

"We are now at the stage where investors are assessing possible policy responses," said Benoit Peloille, Chief Investment Officer at Natixis Wealth Management. "If the conflict continues for a longer period, central banks will respond in some way, although we are not yet at that point."