A top J.P. Morgan strategist tackles some of the biggest myths about the war in Iran

By Joseph Adinolfi

 The U.S. economy isn't as insulated from a war-induced energy shock as many investors seem to believe 

 One of the biggest myths about the Iran conflict is that the U.S. economy is mostly insulated from a big energy price shock. 

 Just because the U.S. is a net exporter of certain fuels doesn't mean its economy won't feel some serious blowback from higher global energy costs driven by the conflict in Iran. 

 That is one of several points made by Michael Cembalest, chair of market and investment strategy at J.P. Morgan Asset & Wealth Management, in his latest report published on Monday. 

 Cembalest has a big following on Wall Street, and his past reports have tackled important topics like the feasibility of Big Tech's ambitious AI-buildout goals - although lately, he has focused his attention on global energy markets. 

 He began this latest report with a summary of American military successes during the five weeks since the start of the Iran conflict. But despite the U.S.'s success in bringing about a substantial reduction in Iranian missile and drone strikes, Cembalest said headlines about the conflict reminded him of the plot of Stephen King's "Salem's Lot." 

 For readers unfamiliar with this particular story, Cembalest offered a summary: "The main character journeys to a town called Jerusalem's Lot with the best of intentions to fight evil. Things don't quite go according to plan, the town is eventually burnt to the ground and depopulated with residents turning into vampires and everyone ends up worse off than at the beginning." 

 The limits of U.S. energy independence 

 After this, Cembalest turned his attention to rebutting a widely believed yet, according to him, incorrect idea pertaining to how the spike in energy prices caused by the war might redound on the U.S. economy. 

 "The notion that the U.S. is insulated from market consequences of the Strait of Hormuz being closed is mostly false," Cembalest said in the report, adding: "U.S. fossil-fuel independence is not as much of an economic firewall as you might think." 

 Critically, Cembalest's argument in support of this conclusion doesn't rest on theory or conjecture. Instead, it draws from what is actually happening in the marketplace. 

 Despite all of the headlines warning about the risks that many European and Asian nations face due to the closure of the Strait of Hormuz, prices of many refined petroleum products, and even crude oil itself (CL00), have seen larger increases in the U.S. market. 

 The challenge of reopening the Strait of Hormuz 

 President Trump has repeatedly insisted that the Iranians must reopen the Strait of Hormuz immediately, or face dire military consequences. 

 Trump's latest deadline expires on Tuesday evening - but so far, Iran's primary takeaway from its perceived efforts to turn the global energy chokepoint into a toll road is that the strategy is working surprisingly well. 

 To support this, Cembalest cites a comment from Bloomberg Middle East economist Dina Esfandiary that Iran has learned that holding the global economy hostage is cheaper, and easier, than it probably expected. 

 Even if the strait were to reopen tomorrow, it would take time for production in the region to return to its preconflict levels. There are also factors that could complicate an escalation; for instance, the U.S., Israel and Gulf states may be running low on interceptor missiles, according to Cembalest. 

 And Iranian strides in drone-making capabilities have boosted the country's ability to wage asymmetric warfare. The chart below captures the disparity nicely. 

 "While drone payloads are much smaller, (a) it only takes small payloads to cause tremendous damage to much more expensive aircraft, ships and radar systems, and (b) drones carry more payload per unit cost than many missile systems," Cembalest wrote. 

 Changes to the U.S. fleet could also hinder the U.S. Navy's ability to clear the strait. Only four aging minesweepers remain in the fleet, and all of them are slated for retirement. 

 Many on Wall Street have pointed out that the selloff in U.S. stocks has been relatively contained so far - at least compared with other recent shocks like last year's post-"liberation day" tariff tantrum, the beginning of Russia's invasion of Ukraine in 2022, and the onset of the COVID-19 pandemic. 

 Stephanie Link, chief investment strategist at Hightower Advisors, told MarketWatch earlier that the fact that U.S. stocks have held up so well is "fascinating." She pointed to Wall Street analysts' rising earnings forecasts and the fact that the U.S. labor market remains on steady footing as two reasons that could possibly explain U.S. stocks' relative resilience. 

 Link has maintained a rosy outlook on the market. But at the same time, she said that if the Iran conflict were to drag on for longer than a few months, it could have serious repercussions for markets and the U.S. economy. 

 "If it's longer term, I think it's more problematic for sure," Link said. 

 -Joseph Adinolfi 

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04-06-26 1748ET

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