Stock Market Update: The Impacts of War

• Near-term catalysts for sharper declines include destruction of energy infrastructure, American casualties, or ground troop deployment; some energy infrastructure damage has already occurred
• Valuations have improved with S&P 500 falling below 20x P/E for the first time since tariff-induced weakness, Europe below 15x, and emerging markets at 12x
• Several correction indicators are flashing potential buy signals: S&P 500 RSI at 32 (oversold), investor sentiment at 30% bullish vs 52% bearish (over 20-point spread), and only 28% of S&P 500 stocks trading above 50-day moving averages

Market Summary: War's Impact on Global Equities

Key Market Movements

Global equity markets have experienced significant declines since Middle East hostilities began three weeks ago. The S&P 500 is down 6%, while international markets show steeper losses: Canadian TSX (-9%), Emerging Markets (-9%), Europe (-10%), and Asia (-8%). Markets initially showed resilience but are now experiencing sustained weakness.

Critical Risk Factors

Three events identified as potential catalysts for more dramatic market reactions include: destruction of energy infrastructure, American casualties, and potential ground troop deployment. Energy infrastructure has sustained some damage, contributing to current market pressure, though American casualties remain minimal and ground operations appear unlikely.

Valuation Analysis

The pullback has reduced market valuations notably. The S&P 500 has dropped below 20x price-to-earnings for the first time since recent tariff-related weakness, with P/E ratios declining approximately two points across markets. Europe trades below 15x and Emerging Markets at 12x.

Technical Indicators

Several oversold signals are emerging: S&P 500 RSI at 32, investor sentiment showing 30% bullish versus 52% bearish (a spread exceeding 20), and only 28% of S&P 500 companies trading above their 50-day moving average. The VIX has risen but hasn't reached capitulation levels.

Investment Outlook

The analysis suggests geopolitical-driven weakness typically presents buying opportunities absent recession risks. Current economic momentum may absorb higher energy prices, though uncertainty could continue pressuring valuations. Political factors, including approaching mid-terms and gasoline prices, could prompt policy pivots.

Author: Craig Basinger, Chief Market Strategist, Purpose Investments Inc.