The Middle East conflict reignites market concerns! Morgan Stanley is the first to withdraw its bullish stance on US stocks

The Zhitong Finance APP noted that the escalation of tensions in the Middle East has intensified market concerns about inflation and the timing of U.S. interest rate cuts, prompting at least one Wall Street institution to adopt a cautious stance on the prospects for new highs in the stock market.

Although the S&P 500 index rose on Monday due to expectations that the conflict between Iran and Israel would not escalate into a full-scale war, JP Morgan's trading department has abandoned its tactical bullish stance on the U.S. stock market, citing increased risks and a higher likelihood of a market correction.

"While the strategy of buying the dip has worked repeatedly for investors this year, we believe it is best to reduce risk exposure now," said Andrew Taylor, global market intelligence head at JP Morgan. He accurately predicted a weeks-long stock market rebound back in April.

In a morning note to clients on Monday, he stated, "Positioning data shows that regardless of the conflict between Israel and Iran, the market itself is prepared for a correction."

There are signs that the risk appetite momentum that has driven the S&P 500 index to rebound 21% since its April low is encountering resistance. The index has hovered around the 6000-point mark for nearly a month, while the so-called "fear index" VIX remains below 20, indicating that investors' concerns about geopolitical and other risks persist.

Taylor's latest assessment may come ahead of a rebound following Friday's market plunge, but Matt Maley, chief market strategist at Miller Tabak, shares a similar view.

Maley pointed out that even if the S&P 500 index challenges its historical highs again, the downside risks at current valuation levels outweigh the upside potential. The index is currently just 1.8% away from its historical peak. "Economic growth is still slowing, earnings expectations are being continuously revised down, and combined with geopolitical uncertainty, this is not an ideal combination."

As the conflict in the Middle East intensifies, the U.S. stock market is already facing multiple headwinds. Although data shows the economy demonstrating resilience under tariff pressures and U.S.-China trade tensions seem to be easing, valuations have returned to first-quarter levels. Additionally, Federal Reserve policymakers insist they are in no rush to cut interest rates.

Investor concerns about overvaluation have already surfaced: the S&P 500 index has been nearly stagnant over the past five trading days, showing little reaction to last week's positive consumer price index and producer price index reports.

Julian Emanuel, head of U.S. equities and quantitative strategy at Evercore ISI, warned that amid intertwined trade and geopolitical uncertainties, active fund managers may sell stocks to protect short-term profits, leading to increased market volatility before summer.

"The current dip-buying is based on the expectation that the situation in Iran will be resolved quickly," he said, "This scenario is unlikely to occur, and even if it does, there are still other unresolved issues." He added that based on a valuation level of over 23 times the earnings expectations for 2025, investors are pricing in geopolitical benefits, but lack substantial evidence to support this