Middle East fires rekindle market concerns! JP Morgan is the first to withdraw its bullish stance on US stocks.

Notice that the escalation of tensions in the Middle East has intensified market concerns about inflation and the timing of a rate cut in the United States, prompting at least one Wall Street firm to shift to a cautious stance on the prospect of the stock market hitting new highs again. Although the S&P 500 rose on Monday amid expectations that the conflict between Iran and Israel would not escalate into a full-scale war, Morgan Stanley's trading desk has abandoned its tactical bullish stance on the U.S. stock market, citing increased risks and a greater likelihood of a market pullback. "Despite the strategy of buying on dips being effective this year, we believe it is now best to reduce risk exposure," said Andrew Taylor, head of global market intelligence at Morgan Stanley. He accurately predicted a weeks-long stock market rebound in April this year. In a note to clients early on Monday, Taylor said, "Position data shows that regardless of how the conflict between Israel and Iran plays out, the market itself is ready for a pullback." Signs indicate that the momentum driving the risk appetite that led to a 21% rebound in the S&P 500 from its April low is now facing resistance. The index has hovered near the 6,000 point level for the past month, while the so-called "fear index" VIX remains below 20, indicating that investors continue to have concerns about geopolitical and other risks. Taylor's latest assessment may have come before the rebound in the market on Friday, but others like Matt Maley, chief market strategist at Miller Tabak + Co, hold a similar view. Maley pointed out that even if the S&P 500 were to challenge its historical highs once again, the downside risks are now higher than the upside potential given current valuation levels. The index is currently only 1.8% away from its all-time high. "With economic growth slowing, earnings expectations continuously being revised lower, on top of geopolitical uncertainty, this is not an ideal combination." As tensions escalate in the Middle East, the U.S. stock market already faces multiple headwinds. Despite data showing resilience in the face of tariff pressures and a seeming easing of U.S.-China trade tensions, valuations have returned to levels seen in the first quarter. In addition, Federal Reserve policymakers are adamant about not rushing to cut rates. Concerns about overvaluation have started to show: the S&P 500 has been virtually flat over the past five trading days, showing a lackluster response to positive reports on consumer and producer price indices from last week. Julian Emanuel, head of U.S. stock and quantitative strategy at Evercore ISI, warned that amidst the intertwining of trade and geopolitical uncertainties, active fund managers may sell stocks to protect short-term profits, leading to increased market volatility before the summer. "The current buying on dips is based on expectations for a swift resolution of the Iran situation," he said, "which is unlikely to materialize. Even if it does, there are still other unresolved issues." He added that investors have priced in geopolitical tailwinds based on a valuation level of over 23 times 2025 earnings expectations, but lack substantive evidence to support this.