"After the 'ceasefire,' the stock market surged, but Wall Street's expectations have changed."

The news of a ceasefire in the Middle East briefly boosted risk assets, but Wall Street strategists warn that the war has inflicted wounds on inflation, energy supply, and the Federal Reserve’s policy space that are difficult to heal quickly.

This week, benchmark U.S. stock indexes rose across the board, with the S&P 500 surging 3.6%—the largest weekly gain since late November last year.

However, the S&P rally showed signs of fatigue and closed down after Friday’s midday session, as the market worries whether this weekend’s peace talks can end the ongoing, six-week war that has deeply impacted the economy.

This upheaval has forced Wall Street strategists to re-examine their optimistic forecasts made at the start of the year. The oil price shock has driven the biggest monthly rise in inflation since 2022, consumer confidence has fallen to historic lows, and traders’ expectations for Federal Reserve rate cuts this year have nearly vanished.

Strategists Generally Raise Inflation Expectations, Push Back Rate Cut Timelines

Several strategists said that they previously did not include the Middle East conflict in their baseline scenarios, and are now stress-testing their price targets and interest rate paths.

David Kelly, Chief Global Strategist at JPMorgan Asset Management, admitted:

At the beginning of the year, we never expected the Middle East would erupt in conflict, nor that U.S. gasoline prices would surge above $4 per gallon.

He expects year-over-year inflation may hit 4% this summer, which will significantly delay the Federal Reserve’s return to a neutral rate (around 3%).

Still, he remains relatively optimistic, believing that most inflationary pressures stem from temporary factors and that inflation may fall below 2% next year, at which point the Federal Reserve could implement one or two rate cuts.

Alexandra Wilson-Elizondo, Global Co-Head of Asset Management at Goldman Sachs, expects the Federal Reserve to maintain a “clearly on-hold” stance until growth and inflation direction become clearer, but she still expects one rate cut this year.

She also pointed out that, for the European Central Bank, which has the sole responsibility of maintaining price stability, it may be forced to raise rates.

Ann Miletti, Head of Equity Investments at Allspring Global Investments, initially expected the Fed to cut rates twice this year, but has now postponed one of those cuts to 2027. She said:

The slowdown in growth has been greater than we anticipated, and inflationary momentum is stronger than expected.

Disagreement Widens Over Risk Assets; Fixed Income and Credit Markets Gain Attention

With short-term U.S. Treasury yields rising, some strategists are looking for opportunities in the fixed income sector.

Wilson-Elizondo noted that the two-year Treasury yield has risen about 50 basis points to around 3.8% since the outbreak of the war. She said:

The market has created opportunities for us to reposition in fixed income, especially in the U.S. market.

She also warned that corporate credit faces more pressure for risk repricing, and that “the credit cycle seems to be turning.”

Last month, BlackRock Investment Institute changed its risk asset allocation from overweight to neutral. Institute Head Jean Boivin said:

We might return to a preference for risk assets or conclude that the damage caused by supply shocks and stagflation will dominate future trends.

BlackRock remains underweight on long-term U.S. bonds, instead favoring European bonds, expecting long-term rates to continue rising.

Julian Emanuel, Chief Equity and Quantitative Strategist at Evercore ISI, is relatively optimistic, citing robust earnings and manageable bond yields as supporting factors, but he cautions that oil prices are a key variable. He said:

If WTI crude oil can remain stable below $90 for the rest of the year, the stock market should perform well.

Institutions Maintain and Lower Target Prices Simultaneously

Most institutions are currently choosing to maintain their full-year targets for now, but their reasons and confidence vary.

Luca Paolini, Chief Strategist at Pictet Asset Management, said that the ceasefire news on Tuesday prompted teams close to adjusting positions to pause their actions. Pictet currently expects the S&P 500 to end the year at 7,250 points, European equities to rise about 10%, and the 10-year U.S. Treasury yield to fall below 4.25%.

Pictet expects the Fed and Bank of England each to cut rates once, while the European Central Bank remains on hold.

Scott Chronert, Head of U.S. Equity Strategy at Citi, maintains his optimistic outlook released in mid-December, citing “most of what we’re seeing appears to be transitional.”

But he also acknowledges risks cannot be ignored, including persistently high oil prices leading to elevated rates, private credit market pressure, and potential disruptions from AI and Trump tariff policies.

He points out that earnings upgrades are concentrated in a few large-cap stocks like Nvidia and Broadcom, while market rotation is clearly obstructed. He said:

This is a market still searching for direction, and it’s too early to make firm judgments.

Wells Fargo is one of the few institutions to downgrade its full-year forecast, lowering its S&P 500 target from 7,800 points to 7,300 points.

Chief Equity Strategist Ohsung Kwon believes the current economy is less sensitive to oil prices than previous cycles, and tax refunds will partly offset pressure on consumer spending. However, Ohsung Kwon said:

Unless we see clear earnings-driven deterioration, we still expect the stock market to perform solidly all year.

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