Peace paradox: why does Nomura strategist expect US stocks to fall because of the Iran deal?

The peace agreement between the U.S. and Iran - contrary to investors' expectations - may trigger a sell-off in U.S. stocks, Nomura analyst Charlie McElligott believes, MarketWatch writes. The point, in his opinion, is a possible market reversal after the deal, which could trigger a rotation from technology securities into cyclical ones, which would put pressure on stock indexes such as the S&P 500.

Investors on Wall Street proceed from the assumption that the conclusion of a reliable and long-term peace agreement between the U.S. and Iran will have a positive impact on stocks and other risky assets, notes MarketWatch. However, this seemingly logical position may be wrong, the publication points out. Nomura cross-asset strategist Charlie McElligott thinks so, in particular.

The announcement of a peace agreement between the U.S. and Iran, he believes, will lead to lower interest rates and the U.S. dollar, which will ultimately help revive investor appetite for recently sagging stocks in sectors such as health care or consumer staples. For example, the health care sector of the S&P 500 has fallen just over 6% since the end of February - when the war in the Middle East began - as of Ma. 28 (it was down 25% at its low during that period); and the consumer discretionary sector of America's broad equity market (consumer discretionary) was down 12% from its pre-war level at its low at the end of Ma., but has since recovered and now has a market capitalization of just over 4% above its late February level.

Recently, amid the escalating situation in the Persian Gulf countries and concerns about the stability of the U.S. economy - the securities of these cyclical sectors have often turned out to be the objects of bets on the fall of quotations by hedge fund managers, points out McElligott. In contrast, the securities of technology companies, including chipmakers (due to the shortage of even the simplest high-speed memory chips), grew rapidly, pushing the stock market to new records. But if investor interest - amid the peace agreement - returns to cyclical and value stocks - traders may have to sell positions in "hot tech stocks" to keep up with capital rotation, says the Nomura strategist. Such a rebalancing in the market in favor of sectors more sensitive to the state of the economy is likely to put pressure on indexes like the S&P 500, given that the technology sector is the most heavily weighted in it, McElligott warns.

Besides, notes MarketWatch, on the growing volume of short positions on the market on shares of S&P 500, analysts of Goldman Sachs also point out. The situation, they note, can lead to "short-squeeze" (mass forced closing of short positions) on shares, against which market participants are now actively betting. According to Goldman Sachs, the average share of the S&P 500 index now has a volume of short positions equivalent to 3% of its market capitalization - the highest level since 2011, analysts say.

The S&P 500 has already jumped nearly 16% since the March low reached by the broader American stock market amid the Iran crisis. The tech-heavy Nasdaq Composite rose 24.5% over the same time. This growth was largely driven by a jump in technology stocks. However, despite the war and related inflationary risks, most analysts expect even greater growth of the U.S. stock market by the end of the year. Thus, Goldman Sachs this week raised its target forecast for the S&P 500 index from 7600 to 8000 points, which implies the potential for its growth of more than 6% relative to current figures. In JPMorgan a possible new benchmark for the S&P 500 in 2027 called the mark of 9000 points. Wall Street strategists expect the market to grow on the back of the AI boom.

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