Rising oil prices trigger inflation concerns, RBC warns that in the worst-case scenario, U.S. stocks could plummet by 20%

Wallstreetcn
2025.06.16 11:46
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RBC Capital Markets warned that if the Middle East conflict drives up oil prices and triggers inflation, the S&P 500 index could plummet by 20%. In the worst-case scenario, the index is expected to drop to 4,800 points, retesting the April low. Even in a moderate scenario, a decline of about 13% is anticipated. Despite the calm market performance, RBC analysts believe that the ongoing conflict may exacerbate concerns about the economy and Federal Reserve policies. Morgan Stanley, on the other hand, holds an optimistic outlook on corporate earnings prospects

While Wall Street is still reveling in the recent rally, strategists at RBC Capital Markets have painted a starkly different picture for investors: if the Middle East conflict drives up oil prices and triggers soaring inflation, the S&P 500 index could face a 20% plunge.

On Monday, RBC outlined three possible pullback scenarios in a report, in the worst-case scenario, they expect the S&P 500 index to drop to 4,800 points—a nearly 20% decline from current levels, retesting the lows from April.

This forecast is based on several assumptions: inflation rises to 4%, zero corporate earnings growth in 2024, the Federal Reserve only cutting rates twice, and the 10-year Treasury yield remaining at current levels.

Even in a more moderate scenario, strategists still expect the S&P 500 index to potentially decline by about 13%, ending the year around 5,200 points. The bank's benchmark year-end target for the index is 5,730 points, which is already about 4% lower than current levels.

Despite the conflict between Israel and Iran entering its fourth day, the market has shown surprising calm. On Monday, oil prices retreated after soaring 7% last Friday, as investors reassured themselves that the conflict has so far avoided major energy facilities and seems to remain confined to the two countries.

RBC strategists wrote in the report:

This conflict has the potential to raise additional concerns about consumer health, the broader economic situation, and the Federal Reserve's policy path, and this narrative shift seems to pose a problem for stock prices.

RBC's analysis indicates that the broader and longer the Middle East conflict lasts, the greater the negative impact on U.S. stocks. Current valuation levels have already been stretched into dangerous territory, and any external shock could serve as a catalyst for a bubble burst.

However, not all strategists are so pessimistic about the outlook. Morgan Stanley's Michael Wilson stated in a report on Monday that some indicators suggest corporate earnings performance may exceed expectations in the coming year.

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