Domino Effect Started? US Stocks Face 15% Deep Correction If Oil Prices Don’t Cool Down

TradingKey - The ongoing escalation of geopolitical tensions in the Middle East is triggering a chain reaction across global financial markets. As the conflict involving Iran continues to intensify, international oil prices have surged to a two-year high, while U.S. stocks have been hit by the most severe institutional sell-off in a decade. Wall Street giants such as Goldman Sachs ( GS) and JPMorgan Chase ( JPM) have issued successive warnings.

Oil Prices Surge as U.S. Stocks Face Correction Pressure

In a report, JPMorgan Executive Director Kriti Gupta and Senior Market Economist Joe Seydl noted that the ongoing escalation of the Middle East geopolitical conflict has pushed supply-side anxieties in the global oil market to a fever pitch. International benchmark Brent crude prices remained consistently high around $100 per barrel last week, a level that represents a cumulative increase of over 15% since the beginning of the year.

According to 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% to 15%. Furthermore, this volatility will be transmitted to global developed markets and emerging economies through channels such as capital flows and exchange rate linkages.

Should geopolitical conflicts escalate further, driving oil prices past the $120 per barrel mark, the sell-off in U.S. stocks would shift from an "emotional release" to a "panic-driven stampede," creating a cascading "domino effect."

JPMorgan's analysis suggests that the impact of high oil prices on the U.S. economy will manifest at two core levels: first, by directly pushing up consumer costs—with AAA data showing the national average gasoline price has risen to $3.63 per gallon, up 21% from before the conflict; and second, by suppressing domestic demand through the "wealth effect"—with Federal Reserve data showing U.S. households hold $56.4 trillion in stock assets, 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 lies in the fact that it coincides with a critical juncture where U.S. economic growth momentum is slowing.

Since the start of the year, the U.S. Manufacturing PMI has remained below the 50-point boom-bust threshold for six consecutive months, and job growth in the labor market has also shown a marginal slowdown. Some economic forecasting agencies had previously raised the probability of a U.S. 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 classic "stagflation" combination. Companies will face a double squeeze from rising raw material costs and weakening end-demand, leading to downward revisions in earnings expectations. Meanwhile, the Federal Reserve is caught in a policy dilemma between "fighting inflation" and "stabilizing growth"; if it continues to hike interest rates to curb inflation, it could directly trigger a recession.

JPMorgan emphasized in its report that the cumulative effect of sustained high oil prices and the S&P 500 adjustment will produce a destructive demand shock, significantly exacerbating the negative impact on economic growth.

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

Meanwhile, the latest data from the Goldman Sachs futures trading desk shows that during the week of March 3 to March 10, asset management institutions net sold $36.2 billion in S&P 500 futures, marking the largest weekly reduction in position size in over a decade by notional value.

Goldman Sachs strategist Robert Quinn pointed directly to the surge in oil prices caused by the escalation of the Middle East conflict as the core catalyst for this historic move. Geopolitical uncertainty resonated with skyrocketing energy prices, directly triggering a panic-driven exit of institutional capital.

Notably, current market participants are showing a clear divergence in sentiment. While asset management institutions are aggressively selling futures, non-dealer investors such as leveraged funds have shown relative resilience and have not followed suit with directional bets, indicating that some capital remains in a wait-and-see mode regarding the market outlook.

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

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

"Investors are still hoping for the uncertainty to dissipate, but the window of time for the market is narrowing," warned Goldman Sachs analyst John Flood. "If the situation remains at a stalemate, from the perspective of equity indices, we will face substantial downward pressure."