Three Weeks In: Where We Stand on Iran

• The S&P 500 has pulled back 7% and is testing support near 6,490 in a 'decision box' range of 6,500-7,000, with shorter-horizon portfolios reducing equity exposure by roughly 7%
• The Fed kept rates unchanged with futures pricing in no cuts for 2026, a significant shift from pre-conflict expectations, while Powell signals he will serve until a government investigation concludes
• RiverFront maintains recession risk below 30% given US GDP above 2%, unemployment below 5%, and strong earnings, but would reassess if oil stays elevated for 2+ months or if 'gamechanger' events like Arab state attacks on Iran occur

Summary

RiverFront Investment Group has updated its Iran conflict analysis three weeks into the crisis, lowering the probability of a "Quick Deal" scenario from 10% to 5% while raising the "Wider War" scenario to 30%.

Key Market Data:

• Brent crude has spiked approximately 54% from trough to peak since late February, remaining above $100/barrel
• S&P 500 has experienced a -7% pullback, approaching support at 6,490 (the 23% retracement level)
• Fed funds futures now price in zero rate cuts for 2026, a significant shift from pre-conflict expectations
• US GDP is annualizing above 2% with unemployment below 5%

Market Implications:

The Federal Reserve kept rates unchanged at its recent meeting, with Chair Powell signaling cuts are unlikely before H2 2026. RiverFront believes oil at $100+ for six weeks or less is "painful but manageable," but sustained elevated prices for two months could raise recession risk significantly above 30%.

Portfolio Actions:

Shorter-horizon portfolios (5-7 years) have reduced equity exposure by approximately 7%, trimming positions that grew during the multi-year rally. Longer-horizon portfolios remain less reactive to geopolitical events. All balanced portfolios maintain equity overweights, though shorter-horizon strategies are nearing neutral.

The firm identifies potential "gamechanger" events that would alter their outlook: Arab state attacks on Iran, coordinated Iran-linked attacks on Western soil, or Russian/Chinese military intervention. The S&P 500's "decision box" ranges between 6,500-7,000, with a meaningful breach potentially triggering asset reallocation in lower-risk portfolios. Sentiment indicators approach extreme pessimism, though full capitulation hasn't occurred.