The "three major beliefs" supporting the US stock market: the war won't last too long, private credit won't trigger a crisis, and Trump will always rescue the market.

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Since the outbreak of the Iran war, global stock markets have been under pressure, but the scale of sell-offs has been much less severe than similar shocks in history. The reason investors remain on the sidelines is due to three deeply rooted beliefs: the war will not drag on, private credit will not trigger a systemic crisis, and policymakers will eventually step in to support the market.

The S&P 500 index in the US has fallen more than 3% since the conflict began, and the European Stoxx 600 index has declined a bit more, but has stabilized. Notably, the proportion of technically oversold stocks in developed markets is less than 20%, meaning profit-taking remains limited; last week even saw some small-scale buying on dips.

Bank of America strategist Michael Hartnett's team attributes this phenomenon to a still bullish market positioning—The consensus is that the war won’t last too long, private credit does not pose systemic risk, and policymakers have always assisted Wall Street in crises.

However, Barclays strategists warn that market nerves are tightening. "Investors still believe in the existence of a Trump put, which explains why global stock declines are less severe than past oil shocks," they said. "But the longer the Hormuz Strait remains blocked, the more obvious the market’s stagflation characteristics will become." This week, the Federal Reserve, European Central Bank, Bank of Japan, and Bank of England will all hold monetary policy meetings. With oil prices hovering around $100 a barrel, their statements will be closely scrutinized by markets.

Why the sell-off has been delayed

From a market structure perspective, the release of risk-aversion sentiment this time has been highly selective. The Bank of America team points out that outflows are mainly concentrated in high-yield bonds, emerging market debt, and financial stocks, while broader market positions have not reached the levels needed to trigger contrarian "bear panic" buying signals.

Bank of America believes that market corrections typically require three conditions: oversold assets bottoming out, overbought assets being sold off, and safe-haven assets losing favor. "This sequence is evolving, which means once policymakers respond, selling pressure should ease quickly," the team said.

Meanwhile, the sharp increase in hedging demand reflects deep-seated anxiety among investors. Anthony Benichou, cross-asset sales specialist at Liquidnet Alpha, noted that the VIX skew relative to at-the-money volatility is approaching historical highs, meaning the market is paying a high premium for tail risk, a 'classic sign of extreme pessimism.' But he also warns that forced deleveraging and systemic capital flows could still cause violent swings in both directions.

Policy response as a key variable

The current trend has become clearly binary: if oil prices spike and then quickly fall back, inflationary pressures will be seen as temporary and the impact on growth will be limited—Barclays strategists believe that in this scenario, central banks may choose to temporarily ignore price increases, which would ultimately be positive for risk assets. On the other hand, if both inflation and growth are pressured and the economy faces recession risk, the stock market will be more vulnerable to downside.

Political pressure is also notable. The impact of the war on inflation and living costs may force the US government to seek a rapid end to the conflict before the midterm elections. Meanwhile, central banks’ policy space is narrowing—swap markets have fully priced in European rate hikes, expectations of UK rate cuts have been withdrawn, and US rate cut expectations are being reduced.

"We are now in a phase where investors are assessing possible policy responses," said Benoit Peloille, Chief Investment Officer at Natixis Wealth Management. "If the conflict lasts longer, central banks will respond in some form, although we're not there yet."

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