UBS: If the Middle East conflict lasts for several months, the global economy could experience a deep recession, and the S&P 500 may fall to 5,350 points.

UBS: If the Middle East conflict lasts for several months, the global economy could experience a deep recession, and the S&P 500 may fall to 5,350 points.

The ongoing expansion of the Middle East conflict is pushing the global energy market to a critical point, and its macroeconomic consequences may far exceed current market pricing. UBS warns that if the crisis extends into the second half of the year, most major economies worldwide will face recession risks, and the S&P 500 Index may plunge sharply from its current level to 5350 points.

According to Chasewind Trading Desk, UBS released a global economic and strategy report on March 26. The conflict has entered its fourth week, with ten countries directly involved. The blockade of the Strait of Hormuz has obstructed about 20% of global oil and gas flows, and global oil inventories are being consumed at a rate of approximately 9 million barrels per day, with historical lows expected as early as the end of April.

UBS points out that current market pricing still reflects expectations of "the conflict being resolved soon"—credit spreads are narrowing, earnings forecasts are barely downgraded, and global equity ETF funds continue to flow in—this optimistic pricing diverges significantly from the real pressures in the energy market.

If the crisis is prolonged, the combined effect of an energy shock and tightening financial conditions will trigger highly nonlinear economic downside risks, posing a significant shock to global investors.

Three Scenarios: From Temporary Disruption to Deep Recession

UBS has laid out three possible paths.

Scenario One (Five-Week Disruption): The conflict is resolved in early April, Brent crude prices briefly surge to $120/barrel before retreating, macro impact is limited, and the S&P 500 Index is expected to rebound to 7150 points by year-end.

Scenario Two (Two-Month Disruption): Oil price peaks at $130/barrel, global growth falls about 30 basis points below baseline, S&P 500 drops to 6000 points in Q2, then gradually recovers to around 6900 points by year-end.

Scenario Three (Persistent Disruption): The conflict persists until the end of Q3, Brent oil prices remain around $150/barrel for the entire year, global growth falls nearly 100 basis points below baseline, S&P 500 hits 5350 points in Q2 and will not see substantial recovery until 2027.

The report emphasizes that the impact of an oil price shock is distinctly nonlinear. UBS’s model shows that $150/barrel oil’s economic destructiveness is roughly three times that of $100/barrel; if the probability of recession rises by 20 percentage points, the shock could be five times as severe.

Inventory Crisis: Nonlinear Upside Oil Price Risks Approaching

The Strait of Hormuz remains nearly closed. UBS’s energy team estimates, even considering Saudi and UAE’s pipeline alternatives, Iran's remaining exports, and strategic reserve releases, there is still a daily supply gap of about 9 million barrels globally, currently being offset only by rapid inventory consumption.

At the current consumption rate, global oil inventories are expected to fall into the lowest third of historical ranges this week; if the situation persists, historical record lows could be reached by the end of April.

History suggests that when inventories approach extremely low levels, oil prices often experience highly nonlinear increases—preemptive purchasing significantly amplifies upward momentum. UBS notes that in such a scenario, Brent oil prices may move to $150/barrel or even higher levels.

Moreover, secondary impacts on fertilizer and food prices have not been fully factored into the model. The region accounts for about 30% of global fertilizer exports. A sharp rise in energy prices will transmit to global food prices via fertilizer costs. UBS calculates this may add about 50 basis points of inflation pressure to developed economies and up to 240 basis points in emerging markets.

Inflation Surges and Central Bank Policy Diverges Significantly

Inflation's effects cannot be ignored under all three scenarios. Even the mildest five-week disruption could raise global inflation by about 50 basis points this year; two-month and persistent disruption scenarios could see this figure rise to about 90 and 190 basis points, respectively.

UBS believes major central banks’ responses will diverge significantly.

The European Central Bank faces a tight labor market, a single inflation mandate, and policy interest rates near neutral. In the mild shock scenario, it tends toward rate hikes rather than cuts; even in the persistent disruption scenario, UBS expects only a minor reversal of previous hikes, with a stance noticeably more conservative than the Fed.

In contrast, the U.S. Federal Reserve faces a stagnant labor market and policy remains restrictive. The new chair may be more cautious about rate hikes as the economy weakens. UBS believes that in the persistent disruption scenario, if the U.S. enters a recession, the federal funds rate could drop to the zero lower bound by Q3 2027.

The Bank of England is somewhere in between but closer to the Fed’s stance; the Swiss National Bank may push policy rates back into negative territory under persistent disruption; the Bank of Japan is expected to complete its final rate hike this year, then abandon tightening and follow the Fed towards easing.

Equity Markets: Asia and Europe Bear the Heaviest Pressure, Defensive Sectors Favored

Heading into the conflict, the market was in a typical early-cycle rotation—from large caps to small caps, growth to value, U.S. to global markets, credit spreads at historic lows. The core premise was a mild growth-inflation mix, which is being directly eroded by the oil price shock.

Under the persistent disruption scenario, the S&P 500’s target is about 5350 points, with the 12-month forward P/E compressed from the current ~22x to ~18x. U.S. large caps are more resilient than small caps, Europe, and emerging markets, but all will face absolute pressure.

Since the Strait of Hormuz is Asia’s main energy conduit, Asian stocks suffer the most; Europe’s exposure to natural gas also drags its market performance below the U.S.

Historically, the sectors most damaged by oil supply shocks are consistent: autos, consumer durables and apparel, financial services, and capital goods are the weakest industries. If liquidity tightens further under the two-month scenario, U.S. high-yield bond spreads could widen to 600 basis points, exacerbating equity market declines.

Fixed Income: Value Emerging in Short-End, U.S. Long-End Rises Then Falls

UBS thinks fixed income is currently the asset class with the earliest investment value emerging. Short-end rates in various markets have been repriced steeply, reflecting concerns that central banks may need to hike to prevent inflation expectations from unanchoring, but UBS sees this scenario as less likely, expecting the impact mainly in headline inflation, not core inflation.

Under all scenarios, the U.S. 10-year Treasury yield is expected to peak in Q2 2026, synchronizing with 2-year yields, causing a bearish flattening in the yield curve short-term but a marked bullish steepening mid-term. Under persistent disruption, the U.S. 10-year yield could ultimately drop to 2.50%, but that’s a story for 2027.

German 10-year yields peak at around 3% in all scenarios; UBS recommends going long Bunds, targeting 2.75% with a stop at 3.15%. UBS sees the best short-end rate investment opportunities currently in Switzerland, the UK, U.S., and India.

The Dollar Strong Short-Term, Weaker Mid-Term; Gold Awaits Growth Panic

In the initial volatility stage, the dollar will retain its primary safe-haven currency status, especially strong versus Asian emerging market currencies.

However, under persistent disruption, as the Fed turns to aggressive easing, the dollar will face structural depreciation pressure from late 2026 to 2027. EURUSD could fall to 1.10 by year-end, and the yen could be pressured by fiscal worries and BOJ policy shifts, with USDJPY possibly climbing to 175.

Gold has recently been held back by rising real rates and dollar strength, not fulfilling its traditional safe-haven role. But UBS predicts once growth panic overtakes inflation concerns and global yields start falling, gold prices will resume climbing.

UBS suggests $4000–$4250 as a medium-term gold positioning range. Other precious metals with stronger industrial attributes, such as silver, platinum, and palladium, may face greater downside risks in a growth downturn scenario.

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