Global equity markets have come under pressure as crude prices climb and geopolitical conflict intensifies, raising concerns among investors about growth and inflation. Still, strategists at JPMorgan contend that the broader market setup supports a defensive response of adding to equity holdings during the recent pullback rather than moving to persistent risk-off positions.
Sentiment shift and strategist take
JPMorgan's team led by Mislav Matejka described how market consensus initially favored buying the dip, but said commentary shifted after the "2nd weekend of conflict" as many commentators began to warn of a protracted war, higher oil price peaks and growing comparisons to 2022. The strategists warned that "that capitulation in sentiment, in our view, suggests that if one is selling now, the risk of being whipsawed is increasing."
The note emphasizes that while headline worries are understandable, the indicators they monitor do not yet signal a classic, full-scale capitulation. Relative strength indexes, for example, remain above levels usually associated with oversold conditions. In addition, positioning data points to investors trimming risk exposure rather than establishing outright short positions.
Clearing event risk and oil thresholds
The strategists concede that a sharper, clearer market sell-off could still occur if oil moves markedly higher. They highlight a specific scenario in which "the clearing event could be a relatively swift 2-3 days of selling, potentially coinciding with oil hitting 120-130$." Such a rapid repricing would represent a technical unwind rather than the sustained capitulation seen in deeper market crises.
Macroeconomic backdrop and central bank reaction
Despite the immediate shock to sentiment, JPMorgan argues investors should look past short-term volatility. The team believes the current escalation is unlikely to be durable and notes the underlying macroeconomic picture remains supportive. They reiterate the view that "post the initial bout of derisking, one should use the weakness to add."
On the question of monetary policy, JPMorgan pushed back against the notion that rising oil prices will mechanically force central banks to tighten. As they put it: "Mechanically oil prices going up means higher headline CPI, but we find it very hard to believe that oil price spikes driven by a geopolitical escalation, which is clearly growth bearish, warrants liquidity tightening by central banks." Nevertheless, markets have already priced in tighter policy since the escalation, with forecasts for the European Central Bank's 2026 policy rate rising by more than 55 basis points and traders paring back expectations for Federal Reserve rate cuts.
The strategists note that these repricings may be reversed if the shock meaningfully undermines economic activity. In such a scenario, central banks would have little reason to further tighten policy, and a transient inflation surge could be treated as temporary and looked through.
Fundamentals entering the conflict
JPMorgan points out that the global economy entered the recent escalation with relatively solid fundamentals, including persistent activity momentum and positive earnings growth. They also flag that inflation expectations, wage growth and services inflation were trending lower ahead of the escalation - a contrast to the dynamics seen in 2022. "These would typically be a key ingredient for any inflation spiral," the strategists wrote, implying those components are not currently present to fuel a lasting inflation cycle.
Recommended positioning and sector focus
Against this backdrop, the strategists continue to favor adding exposure to cyclical parts of the market. Their sector recommendations include capital goods, semiconductors and consumer cyclicals, alongside a preference for emerging markets and the eurozone. They also expect a rebound in some AI-related stocks that had recently sold off, while warning that the earnings momentum for many of those names is slowing.
JPMorgan further observes that hyperscalers and companies widely viewed as vulnerable to AI disruption have already staged recoveries from recent lows. According to the strategists, hyperscalers are up about 3% on a relative basis, while "AI at risk" names have risen roughly 12%. They caution, however, that this rally could eventually lose steam if earnings for those firms deteriorate over time.
How investors might respond
In sum, the strategists' message is that while volatility has risen and the potential for a short, sharp clearing event exists, the current evidence does not support a blanket shift into defensive positioning or broad-based shorting. Instead, they recommend measured additions to equities after the initial derisking phase, with an emphasis on cyclicals, select AI exposures and regions such as emerging markets and the eurozone that they view as better positioned to benefit if the macro backdrop holds.
Note: This analysis reflects JPMorgan strategists' views and the specific data and scenarios they outlined regarding oil levels, positioning indicators, central bank pricing and sector recommendations. It does not attempt to predict outcomes beyond those explicitly described by the strategists.