• Wolfe Research warns the S&P 500 could drift lower with about 5% more downside if valuations compress toward 18x forward earnings.
  • War-related uncertainty and oil price dynamics (CVX) are weighing on markets, with no clear bottom yet.
  • While near-term sentiment is weak, the long-term earnings outlook remains solid if macro conditions stabilize.

Market Braces for More Volatility

Wolfe Research cautions that the S&P 500 could drift lower in the near term as war-related risks weigh on markets, with a potential further downside around 5% if valuations compress toward about 18x forward earnings. This signals ongoing volatility and a possible pause before any durable recovery, according to people familiar with the matter.

Elevated forward valuations versus long-run norms support the view that further multiple compression could occur if earnings growth does not materialize as expected. Recent commentary notes the S&P 500’s forward P/E improving but still above historical averages, suggesting it isn’t yet “cheap” despite a pullback. The broader geopolitical backdrop, including war-related uncertainty and oil price dynamics, often triggers shallow pullbacks in equities that can deepen if conflict persists or inflates inflation, which in turn tightens financial conditions.

Sector Sensitivity and Macro Factors

Market narratives emphasize the Information Technology sector’s valuation sensitivity to AI-driven premium cycles, contributing to the overall index’s valuation discipline and potential for compression if AI-driven growth expectations normalize. Near-term sentiment remains weak, but analysts point to a more favorable long-term earnings outlook if macro conditions stabilize and inflation/monetary policy paths become clearer.

War-related risk can affect markets via higher oil prices, elevated inflation expectations, and tighter financial conditions, increasing the probability of a continued risk-off environment and earnings volatility. Government policy responses influence market trajectories by shaping growth, inflation, and rates; Wolfe’s scenario implies policy and macro expectations could shift if the economic toll of conflict worsens.

Historical Context and Outlook

Historically, geopolitically driven shocks often produce immediate short-term declines followed by recoveries as information clarifies the situation; the magnitude and duration depend on subsequent changes in oil, inflation, and growth expectations. Prior episodes show that even large drawdowns can reverse when earnings visibility improves and financial conditions ease, though the timing is uncertain and depends on macro developments.

In the short term, there's potential for further downside if war risks persist, oil spikes, or inflation pressures re-emerge, leading to more multiple compression. Medium to long term, earnings resilience and a normalization of policy conditions could support a rebound, but the timing remains contingent on geopolitical and macro developments; some strategists see potential for a durable rebound if conditions stabilize.

Other market voices have projected varied paths for the S&P 500, with some arguing for sizable upside if earnings growth and policy easing occur, while others warn of continued volatility and potential pullbacks tied to macro or geopolitical risks. War and macro risk discussions emphasize watching oil, inflation, and rate trajectories as key determinants of whether selloffs evolve into sustained declines or are short-lived noise.

Correction: An earlier version of this article misstated the exact valuation compression percentage; it has been updated to reflect Wolfe Research's estimate of about 5% downside.