On February 28 local time, the United States and Israel launched a large-scale joint air and naval military strike codenamed "Roaring Lion" against Iran. The attack targeted the presidential palace in Tehran, military bases, and nuclear facilities. Iran's Supreme Leader Ayatollah Khamenei was confirmed killed in the assault. Iran subsequently announced the closure of the Strait of Hormuz and initiated retaliatory strikes against US military bases.

The sudden escalation of geopolitical tensions in the Middle East triggered a decline in investor risk appetite. Coupled with rising oil prices intensifying inflation concerns and prompting traders to reduce bets on Federal Reserve interest rate cuts this year, futures for the three major US stock indices fell collectively in Monday's pre-market trading.

However, strategists at Morgan Stanley believe the conflict in the Middle East is unlikely to derail their bullish outlook for US equities, barring a sharp and sustained spike in oil prices. Analysts at Standard Chartered also noted that US stocks can withstand the shock from the escalating Middle East situation, suggesting investors consider buying on dips if a 5%-10% market correction occurs.

A team of equity strategists at Morgan Stanley, led by Michael Wilson, stated in a report that historical data shows geopolitical risk events have not led to sustained volatility in US stocks, citing the average performance of the S&P 500 index in the months following such events. The strategists indicated that for the current Iran conflict, the primary bearish scenario would stem from a significant and prolonged rise in oil prices, which could disrupt the business cycle recovery they believe is strengthening. They noted, "Unless oil prices spike by a historically significant magnitude and remain elevated, recent events are unlikely to change our bullish view on US stocks for the next 6 to 12 months."

This team had previously set a year-end 2026 target of 7800 for the S&P 500 in a January report, citing "multiple synergistic drivers" fostering a rolling cycle recovery in the US stock market. The bank characterized 2026 as a "broad-based equity bull market under a rolling recovery," advocating for a return of market risk appetite "from points to areas" and simultaneous cyclical sector upturns, led by cyclical stocks in the second phase of the bull market.

The year has already presented challenges for the S&P 500, with US stocks underperforming international markets due to factors including concerns about AI disruption risks and the policy impact of a potential Trump administration. For Wilson, the healthcare sector remains the preferred defensive allocation due to cheap valuations, improving earnings, and reduced policy uncertainty, factors that have helped attract broader investor interest.

In contrast, Lori Calvasina, a strategist at RBC Capital Markets, warned against over-relying on historical studies that suggest buying dips during geopolitical bad news. While technically correct for bulls, she cautioned that this view is driven by trends stemming from "more limited" conflicts. She stated, "For the stock market, it's difficult to view geopolitical events in isolation. What's happening geopolitically is usually part of a larger puzzle."

Meanwhile, Steve Brice, an analyst at Standard Chartered, said markets are digesting the unprecedented geopolitical shock from Middle East tensions relatively well, with equity declines currently contained to around 2%. The core investment thesis remains buying on significant pullbacks. Acknowledging increased uncertainty, Brice noted that a 5% to 10% stock market decline could present a buying opportunity. He emphasized that markets entered this period of panic against a backdrop of strong fundamentals. "We are essentially in a 'Goldilocks' economic environment. Growth is remarkably robust, US inflation is indeed falling, albeit slowly. We expect Fed rate cuts, and corporate earnings remain solid," he said.

Nonetheless, sustained high oil prices could gradually erode this favorable economic environment. Brice stated that investors are currently focused on assessing potential drawdowns under different scenarios. "I think this is what the market is trying to figure out – how large a drawdown in equities might occur under both base-case and tail-risk scenarios, and how to position investments accordingly," he said.

While closely monitoring developments, Brice maintains his pro-risk asset stance. He described the current environment as "likely a transient phase overall, though it is very different from anything we've experienced before." He also acknowledged the need to remain flexible and willing to adjust investment positions if the situation deteriorates further.

The analyst highlighted a key difference between the current situation and past Middle East military interventions. "Past military actions in the Middle East typically involved ground troop interventions and could be contained relatively quickly. This time is very different; the risk of retaliatory actions in the region is significantly higher now," he pointed out.

Although the base-case scenario still holds, Brice warned that due to high uncertainty around potential outcomes, tail risks "might be larger than normal." He characterized the current US and Israeli actions as "a considerable gamble across a range of potential evolutionary paths."