Iran Deal May Broaden Stock Market Rally, Boosting Consumer and Small Caps
Potential Market Impacts of the Iran Deal
By Lewis Krauskopf and Saqib Iqbal Ahmed
NEW YORK, June 15 (Reuters) - A deal to end the Middle East war could strengthen a broad swath of stocks as lower oil prices stand to bolster consumer spending and relieve pressure on inflation and Treasury yields.
Beneficiaries of Lower Oil Prices
Economically sensitive cyclical shares including consumer stocks, shares of smaller companies and equities in more energy-sensitive regions than the U.S. could benefit after the announcement over the weekend to end the war between the U.S. and Iran, investors said. That could turn the market's attention from the dominant technology sector which has been driving gains on optimism over AI-related profits.
The announcement could calm concerns about energy-led inflation hurting economic growth. U.S. crude prices hit a three-month low on Monday after the deal, which included reopening of the Strait of Hormuz, a critical oil supply route, while the S&P 500 shot 1.7% higher, putting it less than 1% below its all time peak from early this month.
Rotation into Cyclical Sectors
"Easing in geopolitical tensions could alleviate some of the inflation pressures and reduce bond yields," said Angelo Kourkafas, senior global investment strategist at Edward Jones. "That can be the catalyst driving that rotation into cyclical sectors and areas that have lagged."
Consumer and Retail Stocks
As lower oil prices reduce gas costs for consumers, retail stocks such as Home Depot, Target and Macy's could benefit, said Robert Pavlik, senior portfolio manager at Dakota Wealth Management. The S&P 500 consumer discretionary sector was up 1.9% in afternoon trading, while the small-cap Russell 2000 gained 0.9%.
"The end of the war could help fuel the belief that consumers will have discretionary money to spend somewhere else," Pavlik said.
Strategists at BCA Research said on Monday they were initiating a "tactical long" position in the consumer discretionary sector "on easing geopolitical tensions and oil-price relief."
Technology Sector Remains Strong
Investors may be looking for relative bargains in a market that has been dominated by tech. Since the war began in late February, the S&P 500 tech sector is up 28% against a 10% rise for the broader index.
Still, Pavlik and others said investors may be reluctant to move from tech stocks, while they are performing well. Indeed, on Monday, tech was the best-performing sector, rising more than 3%.
"A sustained ceasefire between the U.S. and Iran, combined with easing oil prices, could help the rally broaden beyond AI and tech," said Anthony Saglimbene, chief market strategist at Ameriprise, adding that on Monday, "investors appear most interested in bidding up established winners."
Market Outlook for the Second Half
Expectations for Broader Equity Strength
BROADENING IN THE SECOND HALF?
For now, a number of market strategists are expecting an expansion of equity strength.
JPMorgan equity strategists said on Monday they were looking for broadening in the second half of the year.
"If our positive macro view plays out - underpinned by strong earnings, stable inflation expectations, and an easing of geopolitical risks in the second half - cyclicals should remain well positioned to outperform through year-end," the JPMorgan strategists said in a research note.
Morgan Stanley equity strategists see "relative strength" ahead for consumer discretionary goods, transport and regional bank stocks, where earnings trends are improving.
"A broadening to under-owned cyclical groups is underway," Morgan Stanley said in a note on Monday.
Global Market Effects
The end to the Iran conflict could be relatively better for other regional markets whose countries have been seen as more vulnerable than the U.S. to the spike in oil prices.
"While recent shocks have reinforced U.S. resilience, the de‑escalation in energy, with oil near about $80, could act as a catalyst for catch‑up flows into ex‑U.S. markets," Manish Kabra, equity strategist at Societe Generale, said in a note on Monday.
Interest Rates and Further Broadening
Role of Rate Cuts
RATE CUTS NEEDED FOR BROADENING?
Some investors say other factors may be needed to help the market broaden. That includes the outlook for interest rates; markets have flipped from pricing in rate cuts at the start of the year, to factoring in a potential hike, as inflation climbed following the energy price spikes.
The Federal Reserve is expected to hold rates steady at its meeting this week.
Tech Sector's Influence on Market Leadership
"When you think about whether the rest of the market will outperform the AI story, I think for that, you may have to see rate cuts being priced in," said Sonu Varghese, global macro strategist at Carson Group.
Paul Nolte, senior wealth advisor and market strategist at Murphy & Sylvest Wealth Management, who has positions in financial and healthcare stocks, said tech may need to falter for other areas to take the lead.
"Where you're going to get a boost in the rest of the market is from a stumble in the tech sector, in the AI trade," Nolte said. "Tech has really just kind of sucked all the oxygen out of the room to this point to where it's difficult for any other part of the market to do well."
(Reporting by Lewis Krauskopf and Saqib Iqbal Ahmed; Editing by Megan Davies and Daniel Wallis)
