Wall Street investment banks ignore the fire and inflation, firmly optimistic about the US stock market's upward trend this year

In the first two months of this year, the S&P 500 index showed no signs of life. However, considering the shocks the market has faced, from geopolitical turmoil to disruptive threats posed by artificial intelligence, the US stock market can be considered resilient. But this stands in stark contrast to Wall Street bulls’ expectations for the performance of this benchmark index by the end of 2026. Despite various potential headwinds, the average price target for the S&P 500 at the close in December is still projected to rise by 10% from current levels, unchanged from expectations at the beginning of the year. According to Bank of America’s sell-side sentiment indicator, strategists have also kept their asset allocation weights unchanged.

Their optimism stems from expectations of above-average economic growth in the US and corporate profit growth. Moreover, while it’s still too early to draw conclusions, institutional tracking all strategists have not become cautious since the US began its military actions in the Middle East. This conflict has currently driven up energy prices.

Sameer Samana, head of global equity and real assets at Wells Fargo Investment Institute, stated, “The key lies in the fundamentals of the macro economy and corporate profits, and so far, geopolitics does not seem to have impacted them. The Iran conflict is different from other conflicts; if oil prices remain high for months or quarters, it could threaten the global economy and corporate profits.”

The war between the US and Iran is just the latest blow to investor confidence this year: persistent inflation and changing tariff policies make it difficult for companies to plan, the application of artificial intelligence could disrupt multiple industries, and private credit firms are struggling under the weight of bad loans, while Trump’s ambitious foreign policy has left both US allies and adversaries feeling uneasy.

On Monday, analysts advised clients that any market pullback related to Iran would be a good buying opportunity. Companies ranging from Morgan Stanley to Piper Sandler & Co. reiterated their optimistic views on the stock market, citing past examples of geopolitical turmoil, which often lasted for shorter durations.

On Monday, the S&P 500 index closed nearly flat, erasing an early 1.2% decline. Some believe this optimism is misplaced.

Matt Maley, chief market strategist at Miller Tabak + Co LLC, said, “This complacency has reached an incredibly unbelievable level. We have reached a point where investors will buy the dips until this strategy fails. The problem is that when the inevitably coming correction arrives, many investors will suffer severe losses.”

According to Savita Subramanian, head of equity and quantitative strategies at Bank of America, despite changes occurring within the market, “once-thriving growth areas have sharply downgraded,” but stock market sentiment has “remained firmly optimistic” this year.

Despite various short-term concerns, the bullish view among strategists remains based on the premise that US corporate profit engines are sufficient to continue driving the stock market higher. However, during the recent earnings season, strong financial data—S&P 500 component companies’ profits grew by 13%, nearly 6 percentage points above expectations—was not enough to boost stock investors’ confidence. From JPMorgan Chase’s early earnings report to Walmart’s performance release, the S&P 500 fell by 1.7%.

Moreover, another dangerous signal has emerged in the market. Alternative investment management firm Blue Owl Capital (OWL.US) recently suspended redemptions for one of its funds and began selling loans to raise capital. The company warned that increasing borrower pressures, rising interest costs, and the leverage effects left over from the low interest rate era are beginning to put pressure on parts of the private credit market. For stocks, this means that credit tightening and potential defaults could impact corporate profits, especially in highly leveraged industries.

Maley remarked, “Everyone thinks that whether it’s the Fed’s policy adjustments or Trump’s policy changes, they can prevent even the slightest decline, which is a major, major misconception. Sooner or later, any of these issues will lead to a decline in profit expectations, which will cause severe panic among investors.”