News of a ceasefire in the Middle East provided a brief boost to risk assets, but Wall Street strategists warn that the war has left scars on inflation, energy supplies, and the Federal Reserve's policy room that will be difficult to heal quickly.
This week, US equity benchmark indices saw broad gains, with the S&amp;P 500 surging 3.6%, marking its largest weekly gain since late November last year.
<img src="https://imageproxy.pbkrs.com/https://wpimg-wscn.awtmt.com/eea4523b-d0e4-44b6-bb69-14255d5a681b.png?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://wpimg-wscn.awtmt.com/eea4523b-d0e4-44b6-bb69-14255d5a681b.png"/>
However, the S&amp;P rally showed signs of fatigue and closed lower after Friday's midday session, as the market worried whether weekend peace talks could end the six-week war that has already deeply impacted the economy.
<img src="https://imageproxy.pbkrs.com/https://wpimg-wscn.awtmt.com/5b8d4913-5559-4418-8f16-c9545d1d76a0.png?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://wpimg-wscn.awtmt.com/5b8d4913-5559-4418-8f16-c9545d1d76a0.png"/>
This volatility has forced Wall Street strategists to re-examine the optimistic forecasts made at the start of the year. Oil price shocks drove inflation to its largest monthly increase since 2022, consumer confidence fell to record lows, and trader expectations for Fed rate cuts this year have nearly evaporated.
<h2>Strategists Generally Raise Inflation Expectations, Push Back Rate Cut Timelines</h2>
Several strategists said they had not included the Middle East conflict in their baseline scenarios and are now stress-testing price targets and interest rate paths.
J.P. Morgan Asset Management Chief Global Strategist David Kelly admitted:
<blockquote>
We didn't anticipate the conflict in the Middle East at the start of the year, nor did we expect US gasoline prices to soar above $4 per gallon.
</blockquote>
He expects year-over-year inflation could touch 4% this summer, which would significantly push back the Fed's timeline for returning to a neutral rate (around 3%).
However, he remains relatively optimistic, believing that much of the inflationary pressure is due to temporary factors and that inflation could fall below 2% next year, at which point the Fed might implement one or two rate cuts.
Goldman Sachs Asset Management Global Co-Head Alexandra Wilson-Elizondo expects the Fed to maintain a &#34;clear wait-and-see&#34; stance until the direction of growth and inflation becomes clearer, but she still expects one rate cut within the year.
She also noted that for the European Central Bank, with its single mandate of maintaining price stability, it might instead be forced to raise rates.
Allspring Global Investments Head of Equity Investments Ann Miletti, who at the start of the year expected two Fed rate cuts, has now delayed one of them to 2027. She said:
<blockquote>
Growth is slowing more than we expected, and the upward momentum of inflation is stronger than anticipated.
</blockquote>
<h2>Divergence in Risk Assets Increases, Fixed Income and Credit Markets in Focus</h2>
As short-term US Treasury yields rise, some strategists are beginning to find opportunities in the fixed-income space.
Wilson-Elizondo noted that two-year Treasury yields have risen nearly 50 basis points to around 3.8% since the start of the war. She said:
<blockquote>
The market has created opportunities for us to reallocate to fixed income, particularly in the US market.
</blockquote>
She also warned that corporate credit faces more pressure for risk repricing, stating &#34;the credit cycle appears to be turning.&#34;
BlackRock Investment Institute adjusted its risk asset allocation from overweight to neutral last month. Director Jean Boivin stated:
<blockquote>
We may return to a risk-seeking stance, or we may conclude that the damage from supply shocks and stagflation will dominate the subsequent trend.
</blockquote>
BlackRock remains underweight on long-term US Treasuries, favoring European bonds instead, as it expects long-term interest rates to continue rising.
Julian Emanuel, Chief Equity and Quantitative Strategist at Evercore ISI, is relatively optimistic, citing solid earnings and manageable bond yields, but he noted that oil prices are the key variable. He said:
<blockquote>
If WTI crude can stay consistently below $90 for the remainder of the year, the stock market should perform well.
</blockquote>
<h2>Institutions Maintain or Lower Price Targets</h2>
Most institutions are currently choosing to temporarily maintain their year-end price targets, though their reasoning and confidence vary.
Luca Paolini, Chief Strategist at Pictet Asset Management, said that the team, which had been close to adjusting its positions, paused following Tuesday's ceasefire news. They currently expect the S&amp;P 500 to end the year at 7,250, with European stocks up about 10%, and the 10-year Treasury yield falling below 4.25%.
Pictet expects one rate cut each from the Fed and the Bank of England, while the ECB remains on hold.
Citigroup US Equity Strategy Head Scott Chronert maintains the optimistic forecast he issued in mid-December, reasoning that &#34;most of what we see now appears transitory.&#34;
But he admitted risks cannot be ignored, including sustained high oil prices keeping rates high for longer, pressure in the private credit market, and potential disruptions from AI impacts and Trump's tariff policies.
He noted that earnings upward revisions are concentrated in a few mega-caps like Nvidia and Broadcom, and the market rotation process has been clearly obstructed. He said:
<blockquote>
This is a market still looking for direction; it is too early to make a definitive judgment.
</blockquote>
Wells Fargo is among the few institutions to lower its full-year forecast, cutting its S&amp;P 500 Price Target from 7,800 to 7,300.
Chief Equity Strategist Ohsung Kwon believes the current economy is less sensitive to oil prices than in past cycles, and tax refunds will partially offset pressure on household consumption. However, Kwon said:
<blockquote>
Unless we see clear earnings-driven deterioration, we still expect solid full-year performance for the stock market.
</blockquote>

.SPX

BNKU

FNCL

Major Wall Street institutions have generally raised inflation expectations and pushed back rate-cut timelines, becoming more cautious about risk asset allocation. BlackRock has adjusted its risk asset stance from overweight to neutral, while Wells Fargo lowered its S&P 500 Price Target to 7,300. Most institutions are temporarily maintaining their price targets but with less conviction, generally believing the current situation remains highly uncertain

- Recent ceasefire news briefly boosted risk assets, but Wall Street strategists warn the conflict has left lasting impacts on inflation, energy supply, and Federal Reserve policy.  
- U.S. stock indices surged, with the S&P 500 gaining 3.6% for its largest weekly rise since last November, yet concerns over the effectiveness of upcoming peace talks led to a pullback.  
- Inflation expectations have risen, with many strategists pushing back rate cut timelines and adjusting forecasts in light of the economic disruptions caused by the ongoing war.

"Ceasefire" Sparks Stock Surge, but Wall Street Expectations Have Shifted