Has the Domino Effect Started? If Oil Prices Don’t Cool Down, US Stocks Could Face a 15% Deep Correction

TradingKey - The ongoing escalation of geopolitical tensions in the Middle East is triggering a chain reaction across global financial markets. As the conflict with Iran continues to intensify, international oil prices have surged to a two-year high, exacerbating the recent sell-off in the S&P 500, with Wall Street giants such as Goldman Sachs ( GS) and JPMorgan Chase ( JPM) issuing a series of warnings.

Rising Oil Prices Put Pressure on US Stocks for a Correction

In a report, JPMorgan Executive Director Kriti Gupta and Senior Market Economist Joe Seydl noted that the ongoing geopolitical conflict in the Middle East has pushed supply-side anxiety in the global oil market to a peak—international benchmark Brent crude prices remained at a high of around $100 per barrel throughout last week.

Based on the bank's quantitative model estimates, if oil prices remain sustained above $90 per barrel over the long term, the S&P 500 will face correction pressure of 10%-15%, and this volatility will be transmitted to global developed markets and emerging economies through channels such as capital flows and exchange rate linkages.

If geopolitical conflicts escalate further, causing oil prices to break the $120 per barrel mark, the sell-off in US stocks will shift from "emotional venting" to a "panic-driven stampede," creating a multi-layered "domino effect."

JPMorgan's analysis suggests that the impact of high oil prices on the US economy will be reflected at two core levels: first, by directly pushing up consumer costs—AAA data shows that the national average gasoline price has risen to $3.63 per gallon, up 21% from before the conflict; and second, by curbing domestic demand through the "wealth effect"—Federal Reserve data shows that US households hold $56.4 trillion in equity assets, and every 10% drop in the S&P 500 could lead to a reduction in consumer spending of approximately 1%.

The report also pointed out that the uniqueness of this round of high oil price shocks is that it occurs precisely at a critical juncture when US economic growth momentum is slowing.

Since the beginning of this year, the US manufacturing PMI has been below the boom-bust line for six consecutive months, and employment growth in the labor market has also shown a marginal slowdown. Some economic forecasting agencies had previously raised the probability of a US recession in 2025 to around 40%.

The high oil prices triggered by the Middle East conflict act as an additional layer of "rising inflation" pressure on top of "slowing growth," forming a typical "stagflation" combination. Companies will face a double squeeze from rising raw material costs and weak terminal demand, leading to downward revisions in earnings expectations, while the Federal Reserve is caught in a policy dilemma between "fighting inflation" and "stabilizing growth." If interest rates continue to be raised to curb inflation, it could directly trigger a recession.

JPMorgan emphasized in the report that the overlapping effects of sustained high oil prices and an S&P 500 correction will generate a destructive demand shock, significantly intensifying the negative impact on economic growth.

S&P Futures Suffer Most Intense Institutional Sell-off in a Decade

Meanwhile, the latest data from Goldman Sachs' futures trading desk shows that during the week of March 3 to 10, net selling of S&P 500 futures by asset management institutions reached $36.2 billion, setting a record for the largest single-week reduction in nominal value in over a decade.

Goldman Sachs strategist Robert Quinn pointed to the surge in oil prices triggered by the escalation of the Middle East conflict as the core catalyst for this historic movement—geopolitical uncertainty and soaring energy prices resonated to directly trigger a panic-driven withdrawal of institutional funds.

It is worth noting that current market participants are showing a clear divergence in attitudes. While asset management institutions are selling off futures in large volumes, investors in non-dealer categories such as leveraged funds have shown relative resilience and have not followed with directional bets, indicating a "wait-and-see" sentiment among some funds regarding the future market.

Echoing the sell-off in the futures market, data from Goldman Sachs' ETF trading desk shows that short positions in US-listed ETFs increased by 10% on Thursday, the second-largest single-day increase in Goldman's history, second only to the extreme market day on April 2, 2025.

This data implies that the overall short exposure of macro-related products has climbed to its highest level since September 2022, closely mirroring market sentiment during the Federal Reserve's aggressive rate-hiking cycle that year, highlighting the current market's level of distress.

"Investors are still hoping for the uncertainty to dissipate, but the time window for the market is narrowing," warned Goldman Sachs analyst John Flood. "If the stalemate persists, we will face substantial downward pressure from an equity index perspective."