As the war between the United States and Israel against Iran enters its second week, oil prices continue to rise, and Wall Street veteran strategist Ed Yardeni significantly downgraded the optimistic outlook for U.S. stocks, warning that the market is approaching the brink of a bear market.
Yardeni raised the probability of a U.S. recession in 2026 from 20% to 35%, while sharply reducing the likelihood of a &#34;melt-up&#34; scenario in the stock market from 20% to 5%.
In a research report released last Sunday, he wrote that the impact of rising oil prices will not dissipate before the Strait of Hormuz reopens, &#34;Before that, financial markets may become increasingly concerned about a 1970s-style stagflation scenario—a period of stagflation that accompanied two recessions.&#34;
Market sentiment is clearly under pressure. S&amp;P 500 futures fell more than 2% during the Asian trading session but later recovered some ground. The VIX fear index surged to its highest level since the tariff turmoil in April, while hedge funds simultaneously increased their short positions in U.S. stock ETFs, and the yield on 10-year U.S. Treasuries rose 4 basis points to 4.18%.
<img src="https://imageproxy.pbkrs.com/https://inews.gtimg.com/om_bt/OON3nLJwWzrKo8Gv1O6_Wsa_HcwoJNMMW2-FTGeSeuoUQAA/641?x-oss-process=image/auto-orient,1/interlace,1/resize,w_1440,h_1440/quality,q_95/format,jpg" alt="" original-src="https://imageproxy.pbkrs.com/https://inews.gtimg.com/om_bt/OON3nLJwWzrKo8Gv1O6_Wsa_HcwoJNMMW2-FTGeSeuoUQAA/641"/>
<h2>Oil Prices Dominate Market Sentiment, Stagflation Risks Surge</h2>
Yardeni pointed out that current oil prices are the primary factor influencing market sentiment. The surge in energy prices impacts the economy through two channels: first, it directly increases consumer spending costs, and second, it raises production and transportation costs for businesses, thereby exacerbating overall inflationary pressures. When inflation rises while economic growth is suppressed, stagflation risks emerge.
On the prediction market platform Polymarket, the probability of a U.S. recession in 2026 has jumped from 22% at the beginning of last week to 34%, confirming that market concerns about the stagflation outlook are rapidly intensifying.
Yardeni noted that the surge in oil futures is accompanied by rising U.S. Treasury yields, a stronger dollar, and falling gold prices, with multiple signals suppressing market risk appetite. The dollar has become the preferred safe-haven asset in this round of conflict, with the Bloomberg Dollar Spot Index rising nearly 2% since the outbreak of war.
&#34;The economy and the U.S. stock market are currently caught between the situation in Iran and difficult circumstances, and the Federal Reserve is no exception,&#34; Yardeni wrote, &#34;If the oil price shock continues, the Fed's dual mandate will be caught in a dilemma—both inflationary risks and pressures from rising unemployment will intensify.&#34;
<h2>S&amp;P 500 and Nasdaq Face Risks of Losing Technical Support</h2>
From a technical perspective, Yardeni believes that the S&amp;P 500 and Nasdaq 100 indices are in a &#34;precarious&#34; situation. He assesses that both indices may soon fall below their respective 200-day moving averages—a long-term trend indicator that is typically regarded as an important technical support level.
Last week, Yardeni had already issued a warning that the S&amp;P 500 faces a 10% to 15% pullback risk due to the impact of the Middle East war. The further surge in oil prices has made him more cautious
&#34;Now we cannot rule out the possibility of a bear market or even a recession, and this clearly depends on how long the Strait of Hormuz remains blocked,&#34; he stated. Generally speaking, a drop of 20% from recent highs constitutes a technical bear market.
The S&amp;P 500 index fell 2% last week, while the broader global stock tracking indicator, the MSCI World Index, declined by 3.7% during the same period. In contrast, the resilience of the U.S. market partly stems from its higher energy self-sufficiency, and previous market concerns about the prospects of artificial intelligence spending and business disruptions have also consumed some upward momentum in advance.
<h2>The logic of safe-haven bonds is also facing a test</h2>
In a stagflation scenario, the logic of the bond market as a safe haven may also fail. Yardeni pointed out that the 10-year U.S. Treasury yield has been &#34;exceptionally calm&#34; over the past year, fluctuating within the range of 4.00% to 4.25%.
&#34;The surge in oil prices may break this calm and push yields to higher levels,&#34; he stated. Currently, the market has pushed back expectations for the Federal Reserve's next rate cut of 25 basis points to September.
On Sunday evening, Trump stated that the short-term pain brought by military action against Iran is worth it, calling a $100 oil price a &#34;small price to pay,&#34; further intensifying market concerns about the continuation of the conflict.
<h2>Extremely low sentiment may be a contrarian buying point</h2>
Despite issuing multiple warnings, Yardeni has not completely abandoned his mid-term optimistic outlook. He maintains his baseline scenario of a &#34;roaring 2020s,&#34; believing that the probability of the U.S. economy achieving steady expansion supported by strong productivity growth remains at 60%, and he assigns an 85% continuation probability for the next decade. He assesses the probability of a &#34;1970s stagflation replay&#34; scenario at 15%.
It is worth noting that Yardeni also stated he is preparing for overly pessimistic market sentiment. &#34;As we pointed out earlier, geopolitical crises often create buying opportunities for the stock market. In the coming days, bearish sentiment may sharply intensify, which will then become a contrarian buying signal,&#34; he wrote.
Yardeni has a track record of market judgments. Last December, he suggested underweighting the &#34;seven tech giants&#34; in the S&amp;P 500, after which the tech sector significantly lagged behind the broader market

CRAK

Wall Street veteran strategist Ed Yardeni warned that with rising oil prices, the probability of a U.S. economic recession has increased to 35%. He pointed out that the oil price shock could lead to "1970s-style stagflation," reducing the probability of an optimistic stock market outlook from 20% to 5%. Market sentiment has been suppressed, with S&P 500 futures once dropping more than 2%, and the VIX fear index soaring. Yardeni emphasized that oil prices are a major factor affecting market sentiment, and rising energy prices will directly increase costs for consumers and businesses, adding inflationary pressure

腾讯新闻 - 财经

iShares US Oil & Gas Expl & Prod

VanEck Oil Refiners ETF

SPDR O&G Equip

VanEck Oil Services ETF

Invesco Oil & Gas Services ETF

ISHRS S&P Glb Engy

VG Energy

MicroSectors™ Energy 3X Leveraged ETN

SPDR Energy Select

United States Oil Fund LP

MicroSectors U.S. Big Oil 3x Lvrgd ETNs

SPDR O&G Ex & Prd

iShares US Oil Equip & Svcs

Wall Street prophet Yardeni: Oil price shock may trigger "70s-style stagflation," U.S. recession probability rises to 35%