Markets just declared Israel-Iran battle over, but three risks remain
Donald Trump’s call for Tehranians to evacuate backs investors’ view that their nation’s defeat looks almost certain. But the danger hasn’t completely passed.
Jun 17, 2025 – 9.22am
The missiles are still flying above Tehran and Tel Aviv, but markets have already moved on.
Strategists, analysts, historians and various talking heads have spent the past four days warning of regime change in the Middle East and oil prices well north of $US100 a barrel. But investors have quickly recovered their composure.
Oil prices actually fell on Monday night and sharemarkets edged higher as the crowd decided that Iran’s response to Israel’s attacks would be limited. No closing the Strait of Hormuz, no attacks on US military targets, just fairly ineffective air attacks on Israel and increasingly desperate calls for a ceasefire.
Indeed, US President Donald Trump’s calls for Tehran residents to evacuate, and his declaration that Iran “is not winning this war” will support the view of investors, who decided a few days ago that Iran’s defeat looks all but certain.
Has the so-called “dumb” money got it right again? While institutional investors fret about a laundry list of worries – tariff-led inflation, slowing growth, cracks in the US labour market, America’s fiscal position and, of course, the threat of a new hot war – retail investors in the US just keep on keeping on. Ownership of equities by US households has climbed to fresh records in recent weeks at 49 per cent of total assets, according to Goldman Sachs. It’s mums and dads who have pushed the S&P 500 and the Nasdaq Composite back towards the record highs set in February.
Indeed, Goldman Sachs is predicting households will buy $US425 billion ($652 billion) of stocks this calendar year, making it the second biggest source of buying in the US market behind corporate buybacks.
Now, that doesn’t mean these investors aren’t taking a risk. Nick Ferres, chief investment officer of macro fund Vantage Point Asset Management, points out that the risk/reward equation for US equities is very poor. At 22 times forward earnings, the S&P 500 has been more expensive in only 14 per cent of its history.
Investors buying at this level appear to be completely dismissing any risk that tariffs start to slow the US economy over the next six months. They’re certainly dismissing the potential for any military conflict to spread in a way that would hit global trade or commodity prices. And they’re not worried about any drama in Washington spilling over from the bond market into stocks.
And fair enough, too. So-called soft economic data such as surveys of businesses, consumers and the labour market is deteriorating, but the hard official data is holding up nicely.
Yes, there is a live debate about when the US Federal Reserve will deliver the next interest rate cut. But retail investors appear in no doubt that the cuts are coming, especially given US President Donald Trump will name a new Fed chairman in the coming months, as Jerome Powell’s term comes to an end. The artificial intelligence boom continues, US earnings have held up reasonably well and recession fears are basically dead, buried and cremated. The three dangers
What is there to worry about? We’d suggest three things.
As Ferres points out, market positioning looks extremely stretched. We came into this year worried US equities were too expensive and too crowded. Now, they are back to a similar position with a range of serious new risks in place. The market simply isn’t positioned well for a shock of any type, and this is an environment where shocks feel more positive.
The second worry is the naming of a new Fed chair. If the bond market gets even a whiff of a threat to the Fed’s independence – which looks distinctly possible given Trump’s repeated calls for rate cuts – then its reaction won’t be pretty. We got a taste of bond market turmoil last month, and it wasn’t fun.
The third risk is that the attacks on Iran do not come to the quick conclusion investors have priced in. BCA Research’s chief geopolitical strategist, Matt Gertken, says there is a risk that Iran is forced to escalate the conflict to try to end it. With Israel seemingly revelling in its dominance and expressing a desire to force regime change, Gertken says Iran may be forced to disrupt the global oil market to force the US to restrain Israel.
That is a risky play for all sides. “Israel’s attacks on Iran will continue until Iran is forced to strike regional oil supply to get the US to restrain Israel,” Gertken says. “That may not work. Investors should prepare for a broader economic impact of the conflict.”
Right now, investors are doing the complete opposite.
