JPMorgan: Investors Have Two Major Misjudgments Regarding the Iran Situation

The U.S. economy is not insulated from energy shocks caused by war the way many investors believe.

In his latest report released this Monday, Michael Cembalest, Chairman of Markets and Investment Strategy at JPMorgan Asset & Wealth Management, points out that two widely accepted judgments circulating in the market about the Iran conflict contain fundamental misperceptions:

First, the U.S. economy can fend off 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 a rapid de-escalation.

Cembalest believes both of these judgments are overly optimistic. As the report was published, Trump’s latest deadline requiring 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 interpret this as a sign that the market is “immune” to the situation. But Cembalest’s analysis suggests that this calm may be built on a systematic underestimation of risk.

Misconception 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 largely unaffected by market impacts from a Strait of Hormuz blockade is basically wrong. The U.S.’s fossil-fuel independence doesn’t form an economic firewall the way you might imagine.”

Supporting this conclusion is not theoretical speculation but the actual direction of today’s market. Even though people outside the region generally focus on the risks faced by European and Asian countries due to a blockade, the reality is that multiple refined petroleum products—and even crude oil itself—have seen even more pronounced price increases in the U.S. market.

This means that even if the U.S. is a net exporter of specific fuels, the global surge in energy prices would still be transmitted to the United States through market mechanisms, creating a tangible shock for consumers and businesses.

Misconception 2: Iran will be forced to quickly back down

The second misconception is that some market participants believe that America’s military pressure and economic costs will compel Iran to reopen the strait as soon as possible. Cembalest is skeptical of this.

In the report, he cites the view of Dina Esfandiary, an economist focused on the Middle East at Bloomberg, saying that Iran has already recognized that its strategy of using the global economy as a hostage has had lower costs than expected and better results than expected. In other words, Iran’s conclusion from the current situation is that the strategy has worked—unexpectedly well.

Cembalest also lists multiple structural factors that make it difficult for the situation to wrap up quickly. First, even if the strait is reopened tomorrow, oil production in the region will still need time to recover to pre-conflict levels. Second, the interceptor missile inventories of the U.S., Israel, and Gulf countries may already be tightening. In addition, Iran’s significant progress in drone manufacturing has greatly enhanced its ability to conduct asymmetric warfare. In the report, Cembalest writes: “Drone payloads may be smaller, but even a small payload can cause massive damage to aircraft, ships, and radar systems that are far more expensive to produce, and the payload carried per drone unit is higher than that of many missile systems.”

The U.S. Navy’s mine-clearing capability is also concerning—currently, only four old mine warfare ships remain in the fleet, and all of them are planned for retirement.

The hidden risks behind a calm stock market

Even though the risks above continue to build, the U.S. stock market has remained relatively steady in this round of conflict, with a decline that is clearly smaller than last year’s tariff turmoil, the outbreak of the 2022 Russia-Ukraine conflict, and the early period of the COVID-19 pandemic, among other historic shocks.

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

But Link also warns about tail risks: “If the conflict lasts more than a few months, I believe its impact on the market and the U.S. economy will definitely be more severe.”

At the start of his report, Cembalest uses a metaphor from Stephen King’s novel “Salem’s Lot,” implying that the trajectory of the situation may diverge sharply from initial expectations: the protagonist, driven by good intentions, goes to confront evil, only to end with the small town being leveled and everyone’s circumstances worse. Perhaps this metaphor is his most concise judgment of the entire Iran situation.

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