JPMorgan: Investors have two major misconceptions about the Iran situation

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The U.S. economy is not as immune to energy shocks triggered by war as many investors believe.

Michael Cembalest, Chair of Market and Investment Strategy at J.P. Morgan Asset & Wealth Management, pointed out in his latest report released this Monday that, regarding the Iran conflict, two widely accepted but fundamentally biased views prevail in the market:

First, that the U.S. economy can withstand the impact of a Hormuz Strait blockade thanks to its energy independence;

Second, that pressure on Iran to reopen the Strait is sufficient to quickly ease the situation.

Cembalest believes that both views are overly optimistic. The report comes as Trump’s latest deadline demanding Iran immediately reopen the Hormuz Strait expires Tuesday evening. Meanwhile, the U.S. stock market’s decline in this round of conflict has been relatively limited, and some investors interpret this as a sign of “immunity” to the situation. But Cembalest’s analysis shows this calm may be based on a systematic underestimation of risk.

Misconception One: U.S. energy independence can resist external shocks

Cembalest directly names this market consensus in the report: "The assertion that the U.S. can be unaffected by the Hormuz Strait blockade is basically wrong. America's fossil fuel independence is not the economic firewall you imagine."

Supporting this conclusion is not theoretical reasoning, but actual market trends. Although the focus is often on the risks faced by European and Asian countries due to the blockade, the reality is that prices for refined petroleum products and even crude oil have actually risen more significantly in the U.S. market.

This means that even if the U.S. is a net exporter of certain fuels, sharp increases in global energy prices will still transmit to the U.S. through market mechanisms, causing real shocks to consumers and businesses.

Misconception Two: Iran will be compelled to quickly make concessions

The second misconception is that some market participants believe U.S. military pressure and economic costs will force Iran to quickly reopen the Strait. Cembalest is skeptical of this view.

He cites Bloomberg Middle East economist Dina Esfandiary’s opinion that Iran has realized the costs of holding the global economy hostage are lower and the results are better than expected. In other words, Iran’s conclusion from the current situation is that this strategy works surprisingly well.

Cembalest also lists multiple structural factors making the situation hard to resolve quickly. First, even if the Strait reopened tomorrow, oil production in the region would take time to recover to pre-conflict levels. Second, the missile interception stocks of the U.S., Israel, and Gulf countries may already be running low. Also, Iran’s significant advances in drone manufacturing have greatly increased its asymmetric warfare capabilities. Cembalest writes in the report: "Although drone payloads are small, even small payloads can cause huge damage to far more expensive aircraft, ships, and radar systems, and the unit payload cost of drones exceeds many missile systems."

The mine-sweeping capability of the U.S. Navy is also worrying—currently, only four aging mine sweepers remain in the fleet, all scheduled for retirement.

The hidden risk behind the calm stock market

Despite accumulating risks, the U.S. stock market remains relatively steady in this round of conflict, with declines much milder than the tariff disputes last year, the outbreak of the Russia-Ukraine conflict in 2022, and the onset of the Covid pandemic.

Stephanie Link, Chief Investment Strategist at Hightower Advisors, told MarketWatch that the resilience of U.S. stocks is "fascinating," attributing it to upgrades in Wall Street analysts’ earnings forecasts and a robust U.S. labor market.

Nevertheless, Link also warns of tail risks: "If the conflict lasts more than a few months, I think the impact on the market and the U.S. economy will certainly be much more severe."

At the start of his report, Cembalest uses Stephen King’s novel "Salem's Lot" as an analogy, hinting that the course of current events may be very different from initial expectations—the protagonist sets out with good intentions to fight evil, but ultimately the town is destroyed and everyone ends up worse off. This metaphor may be his most concise judgment of the entire Iran situation.

Risk Disclosure and DisclaimerThe market involves risks, and investment requires caution. This article does not constitute individual investment advice, nor does it consider the unique investment objectives, financial situations, or needs of individual users. Users should consider whether any opinions, views, or conclusions in this article apply to their specific circumstances. Investing based on this article is at your own risk. ```