War Concerns and Soaring Oil Prices Unsettle Markets, But JPMorgan Says Buy the Dip

Investing.com - Rising oil prices and escalating geopolitical tensions have begun to pressure investor sentiment, but JPMorgan strategists say the broader market backdrop still supports increasing equity exposure during recent weakness.

“Initially, most consensus was to buy on dips, but since the second weekend of the conflict, many experts have started to shift their stance, believing we are facing a prolonged battle, seeking new highs in oil prices, and increasingly comparing the situation to 2022,” said a team led by Mislav Matejka in a report.

“We believe this emotional capitulation indicates that selling now increases the risk of adverse reversals,” they added.

Explore top analyst market strategy insights with InvestingPro

Despite heightened volatility, strategists say that positions and technical indicators have not yet signaled a complete market capitulation. The Relative Strength Index remains above oversold levels, and most holdings data show investors are reducing risk rather than shifting to outright short positions.

They note that if oil prices continue to surge, more intense liquidation episodes could occur. “A liquidation event could be a relatively quick 2-3 day sell-off, potentially coinciding with oil reaching $120-$130.”

Nevertheless, strategists believe investors should look beyond short-term fluctuations. They maintain that the escalation is unlikely to last long, and the macro environment remains supportive. In this regard, they reaffirm, “After an initial risk reduction, it is advisable to add to positions during weakness.”

JPMorgan also refutes the view that rising oil prices will force central banks to tighten policy. “Mechanically, rising oil prices imply higher overall CPI, but we find it hard to believe that a spike driven by geopolitical escalation (which is clearly negative for growth) will prompt central banks to tighten liquidity.”

Despite this, markets have already priced in tighter policy expectations since the escalation. The forecast for the European Central Bank’s 2026 policy rate has risen by over 55 basis points, and traders have scaled back expectations of rate cuts by the Federal Reserve.

Strategists believe these trends may not be sustainable if shocks pressure economic growth. If the conflict ultimately weakens economic activity, central banks are unlikely to tighten policy, and any temporary inflation spikes may be overlooked.

JPMorgan notes that the global economy had relatively strong fundamentals at the outbreak of the conflict, including solid activity momentum and earnings growth. Before the escalation, inflation expectations, wage growth, and services inflation had been declining, contrasting with 2022.

“These are typically key factors in any inflation spiral,” the strategists wrote.

Against this backdrop, they continue to recommend increasing exposure to cyclical sectors such as capital goods, semiconductors, and consumer cyclicals, as well as emerging markets and the Eurozone. They also expect some recently sold-off AI-related stocks to rebound, despite slowing earnings momentum.

Strategists also suggest that the rebound in mega cloud service providers and stocks considered vulnerable to AI disruption could persist in the short term. These two categories have bounced from recent lows, with mega cloud providers up about 3% and “AI risk stocks” up roughly 12%. However, they warn that this trend may eventually lose momentum as many of these companies’ earnings could face pressure over time.

This article was translated with the assistance of artificial intelligence. For more information, see our Terms of Use.