Morgan Stanley's Wilson: Geopolitical shocks can't stop the bull market; as long as oil prices don't double, the S&P 500 still targets 7,800 points.

The Middle East situation has pushed up oil prices and triggered short-term global market risk aversion, but Morgan Stanley’s chief analyst Mike Wilson believes that such geopolitical shocks rarely drag U.S. stocks into sustained declines; the decisive variable remains whether oil prices experience a "historic" and "persistent" surge.

Earlier this week, the conflict between the U.S. and Israel against Iran caused a pullback in market risk appetite, weakening stock indices while gold, oil, and the dollar strengthened. U.S. Treasury prices fell, yields rose, and the market is also assessing the impact of rising oil prices on inflation expectations.

Wilson emphasized that historical data shows geopolitical risk events rarely cause sustained volatility in the stock markets; the S&P 500 on average rises about 2%, 6%, and 8% over 1 month, 6 months, and 12 months after such events.

Wilson further noted that as long as oil prices do not see a year-over-year surge of 75% to 100% and remain high, the bull market logic for U.S. stocks remains intact. He maintains a year-end S&P 500 target of 7,800 points, and stated that for cautious investors, his preferred defensive sector is healthcare.

At the time of writing, Brent crude was up 8.21% to 78.85.

Review: After Most Geopolitical Shocks, Markets Recover Faster

In the report, Wilson says historical statistics show geopolitical risk events are more like "short-lived volatility sources" for U.S. stocks, not the starting point of a trend bearish market. Taking the S&P 500 as an example, returns after related events are generally positive on the 1, 6, and 12 month horizons.

He also pointed out that the most harmful 12-month sample comes from the 1973 Yom Kippur war, with the key factor being the subsequent oil supply shock triggering an economic recession, highlighting the core role of oil prices in the transmission from geopolitical shocks to financial markets.

Bull Market Trigger Conditions: Oil Price Must “Surge and Persist,” Alongside Late Cycle Stages

According to Wilson, the "bear market scenario" related to Iran and Middle East events this weekend mainly arises when oil prices rise significantly and persistently, threatening the continuity of the business cycle.

The historical threshold he gives requires two conditions: First, oil prices must jump 75% to 100% year-on-year; second, the shock must occur in the later stage of the economic growth cycle. Without either one, geopolitical events are more likely to evolve into a phase pullback rather than a structural downturn.

Current Situation: Oil Price Only Up About 8% YoY, Morgan Stanley Maintains 7,800 Year-End Target

Wilson states that the current situation does not meet the above "high-risk combination." He thinks we are in an "early-cycle environment" with profit recovery accelerating.

Currently, crude oil’s year-on-year change is still a modest positive, about 8%. Therefore, he judges that unless oil prices surge rapidly and stay high, recent events are unlikely to change his positive outlook for U.S. stocks over the next 6 to 12 months.

Wilson maintains his year-end S&P 500 target at 7,800 points. If investors favor defensiveness, his top choice is healthcare.

Market Segmentation: Energy and Defense Lead, Airlines Under Pressure

Geopolitical escalation has caused obvious sector segmentation within the market. Lockheed Martin and RTX shares jumped, buoyed by expectations that the U.S. military will consume a large amount of munitions in actions against Iran. Software company Palantir was also one of the few tech stocks to see gains before the market, as it supplies software to the U.S. military.

On the other hand, United (UAL) and American (AAL) airline stocks fell as investors worry Iran-related conflict will disrupt air travel and push up fuel costs.

In U.S. Treasuries, prices fell, driving the 10-year yield higher, reflecting how inflation concerns outweighed safe-haven demand, which itself supports Wilson's view that oil prices are the current macro core variable. OPEC+'s unexpected production increase is currently seen as a potential supply-side buffer by the market.

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