Sell-off or Buy on Dips? The Middle East Powder Keg Ignites the Bull-Bear Showdown in the US Stock Market
As tensions rise in the Middle East, the U.S. stock market has experienced significant volatility, with positions nearing sensitive thresholds, potentially triggering sell-offs or attracting bottom-fishing funds. Federal Reserve Chairman Jerome Powell remains cautious about inflation risks, and the market's reaction to geopolitical news is gradually becoming numb. According to Goldman Sachs data, although hedge funds continue to buy stocks, the pace has slowed, and pension funds are expected to sell $89 billion in stocks during rebalancing at the end of the month, with corporate buyback support weakening and market prospects unclear
According to Zhitong Finance APP, the current positioning in the U.S. stock market is nearing a sensitive threshold: high enough to trigger severe risk-off selling, yet low enough to attract bottom-fishing capital, and breaking this fragile balance requires just one piece of unexpected news.
In recent days, the U.S. stock market has experienced significant volatility as traders track developments in the Middle East. Amid escalating geopolitical tensions, various forces that could either push the market higher or suppress it are engaged in a tug-of-war.
Technical charts are signaling buy or sell, while the impact of rising tariffs and oil prices on the economy and corporate profits remains unclear. Federal Reserve Chairman Jerome Powell has expressed caution regarding inflation risks, stating that given the high uncertainty in the economy, "no one has absolute confidence in the path of interest rates." Most pressing is the growing speculation that the U.S. may join Israel in attacking Iran, which is making the geopolitical backdrop uneasy for the market.
Richard Privorotsky of Goldman Sachs stated, "Will the U.S. stand by or be forced to get involved in the conflict? The market has become accustomed to downplaying such geopolitical news, and its resilience is impressive... perhaps a bit complacent now."
According to Goldman Sachs, hedge funds continued to buy stocks last week, but the pace of buying has slowed, while mutual funds saw outflows of $10 billion. The amount of stock bought by trend-following funds was relatively small, at only $2.8 billion, and they are more inclined to sell rather than buy in the near future.
Goldman Sachs estimates that these funds, known as block trading advisors, will sell more than $17 billion in a down market this week, more than three times the amount during a flat or rising market. Other risk-adjusted investors, such as volatility control funds or risk parity funds, are also unlikely to enter the market amid a new round of uncertainty.
Rebecca Cheong, head of U.S. equity derivatives strategy at UBS Group, indicated that pension funds and Target Date Funds are also expected to sell $89 billion in stocks during the end-of-month rebalancing, which will be another drag on the market in the coming days.
In addition, the support from corporate buybacks is fading as the quiet period before the second-quarter earnings season approaches. Corporate performance will soon become the focus for investors to understand the extent of tariff damage.
The current market landscape puts U.S. stocks in a contradictory position—especially with the summer trading lull approaching, the S&P 500 turnover index typically drops to seasonal lows in July. This means that even small news can have a huge impact on the stock market.
U.S. stocks enter the summer trading lull
The situation in the options market is equally complex. Charlie McElligott, Managing Director of Cross Asset Strategy at Nomura Securities International, pointed out last week that as the spot index climbs close to historical highs, the skew of the S&P 500 index and the so-called "volatility of volatility" have quietly risen.
On one hand, rising spot indices and increasing volatility typically reflect investors chasing upward trends due to severe underexposure, thus pushing the market higher. However, this pattern could also lead to a market collapse under its own pressure The rise in volatility indicators suggests an increase in tail risk.
An increasing number of investors believe that buying on dips is a given. The significant pullback has not materialized because investors expect others to buy on dips, so in the absence of major macro events, investors either continue to hold or even increase their positions.
Ed Yardeni, founder of Yardeni Research, stated: "Stock investors should reconsider the same issues they faced before last Friday's attack on Iran, including Trump's tariffs, his big and beautiful plan, economic growth, inflation, Federal Reserve policy, and artificial intelligence."
