RBC Capital Markets strategists led by Lori Calvasina have issued a stark warning about the vulnerability of US stocks, suggesting the S&P 500 could face a 20% correction if surging oil prices trigger renewed inflation pressures. In a newly published report analyzing three potential downside scenarios, the team cautioned that extended Middle East conflicts pose particular risks to market stability.
Triple Threat Assessment for Equity Markets
The analysis identifies valuation concerns as a critical vulnerability, noting that recent market gains have left stocks trading at elevated multiples. The strategists emphasized that “the broader and longer the Middle East conflict persists, the greater the negative impact on US equities,” with energy-driven inflation representing the primary transmission mechanism.
Scenario Analysis Projects Significant Downside
Under the most severe projection – where geopolitical events substantially boost energy prices – the S&P 500 could retreat to its April lows. A moderate scenario still envisions a 13% decline, while even the mildest outlook suggests meaningful pressure on risk assets. The report specifically highlights how $100+ oil could reignite inflation fears and force the Federal Reserve to maintain restrictive policies.
“The conflict may amplify concerns about consumer resilience, economic growth trajectories, and the Fed’s policy path,” the strategists wrote. “This narrative shift could prove problematic for equity valuations given current stretched positioning.” The warning comes as markets show increasing sensitivity to energy market volatility, with RBC noting that energy prices remain the critical variable for near-term market direction.
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