JPMorgan: Investors Have Two Major Misjudgments Regarding the Iran Situation

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

In the latest report released Monday by Michael Cembalest, Chairman of Markets and Investment Strategy at JPMorgan Asset & Wealth Management, he pointed out that around the Iran conflict there are two assessments that are widely accepted in the market yet contain fundamental misperceptions:

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

• Second, the pressure on Iran to reopen the strait is enough to force the situation to quickly de-escalate.

Cembalest believes both assessments are overly optimistic. As the report was published, Trump’s latest deadline for Iran to immediately reopen the Strait of Hormuz was set to expire on Tuesday evening. Meanwhile, the U.S. stock market’s decline in this round of conflict has been relatively limited, and some investors have interpreted this as a signal that the market is “immune” to the situation. But Cembalest’s analysis shows that this calm may be built on a systemic underestimation of risk.

Misperception 1: U.S. energy independence can withstand external shocks

In the report, Cembalest directly calls out this market consensus: “The claim that the U.S. can be insulated from the Strait of Hormuz blockade market impact is basically wrong. The U.S.’s fossil fuel independence does not constitute an economic firewall the way you might imagine.”

Supporting this conclusion isn’t theoretical reasoning, but the actual trajectory of today’s market. Even though outsiders tend to focus on the risks that European and Asian countries face due to the blockade, the reality is that in the U.S. market, price increases in multiple refined petroleum products—and even crude oil itself—are actually more pronounced.

This means that even if the U.S. is a net exporter of certain fuels, a sharp rise in global energy prices will still be transmitted to the U.S. domestic market through market mechanisms, creating a real impact on consumers and businesses.

Misperception 2: Iran will be forced to quickly back down

The second misperception is that some market participants believe U.S. military pressure and economic costs will force Iran to reopen the strait as soon as possible. Cembalest is skeptical of this.

In the report, he cites the view of Dina Esfandiary, a Middle East economist at Bloomberg, saying that Iran has already realized that using the global economy as a hostage strategy has a lower cost than expected and works better than expected. In other words, Iran’s takeaway from the current situation is that this strategy is working, and it is working unexpectedly well.

Cembalest also lists multiple structural factors that make it difficult for the situation to be resolved quickly. First, even if the strait were reopened tomorrow, oil production in the region would still take time to recover to pre-conflict levels. Second, the stockpiles of intercept missiles held by the U.S., Israel, and Gulf countries may already be tight. In addition, Iran’s notable progress in drone manufacturing has greatly improved its ability to carry out asymmetric warfare. Cembalest wrote in the report: “Although drone payloads are small, even small payloads can cause massive damage to aircraft, ships, and radar systems that are much more expensive to build, and the payload carried per unit cost of drones is higher than in many missile systems.”

The U.S. Navy’s mine-clearing capability is also a cause for concern—currently only four old mine countermeasure vessels remain in the fleet, and all of them are scheduled to be retired.

The hidden risks behind a calm stock market

Although the risks above continue to accumulate, the U.S. stock market has remained relatively resilient in this round of conflict, with declines that are clearly smaller than those of last year’s tariff turmoil, the outbreak of the 2022 Russia-Ukraine conflict, and the early stages of the COVID-19 pandemic, among other major historical shocks.

Stephanie Link, Chief Investment Strategist at Hightower Advisors, said in an interview with MarketWatch that the resilience of U.S. stocks is “fascinating,” attributing it to two factors: Wall Street analysts raising earnings expectations and the U.S. labor market staying solid.

However, Link also cautions about tail risk: “If the conflict lasts longer than a few months, I think the impact on the market and on the U.S. economy will definitely be more severe.”

At the beginning of his report, Cembalest uses a metaphor from Stephen King’s novel Salem’s Lot to suggest that the direction of the current situation may end up very different from what was initially expected—the protagonist sets out with good intentions to fight evil, only for the town to be flattened and everyone’s circumstances to end up worse. This metaphor may be his most concise assessment of the entire Iran situation.