The worst of the US-Iran chaos in markets may be over, according to a longtime Wall Street strategist.
Jim Paulsen, the former chief investment strategist at The Leuthold Group, said that, though he is not certain when the market might bottom, investors are already showing a few positive signs they’ve “adjusted significantly” in response to the conflict in the Middle East, potentially setting stocks up for better days ahead.
“I would not be shocked if the S&P 500 still suffers a correction,” Paulsen wrote in a Substack post on Wednesday. “But I do increasingly believe the financial markets are already showing some positive signs of renewal.”
“The vetting process which plays out during crises is already pronounced and this historically has been a good sign that the worst may already be over,” he later added.
It’s been a rough start to the year for markets, which had already been battered by other geopolitical conflicts and concerns about the AI trade. The S&P 500 is down 1% year-to-date, and as of mid-February, was off to its worst start to the year in at least three decades, according to an analysis from Goldman Sachs.
Here are the signs that suggest investors might soon have an easier time navigating the market.
1. Oil prices look like they’ve peaked
Oil prices soared about a week into the US-Iran war, but they look like they’re likely to remain below the peak. Brent crude, the international benchmark, traded around $90 a barrel Wednesday morning, down 16% from its peak of $108 on Monday.
Oil’s decline has removed a major fear for investors, who were concerned that higher energy prices could stoke inflation while lowering economic growth.
2. The risk of a recession has declined
The sharp drop in crude prices has also led investors to meaningfully dial back their recession outlook. The market probability of a recession this year rose to around 40% when oil prices hit a peak, but the probability of a downturn has since dropped to 29%, Paulsen said, citing data from the online betting platform Polymarket.
3. Investor sentiment has turned more cautious
Investor sentiment has plummeted since the start of the US-Iran war, a contrarian signal for stocks that has historically suggested that markets could rally.
Paulsen pointed to the four-week rolling moving average of the AAII’s Bull Less Bear Stock Market Sentiment Index, a gauge of investor sentiment. The index is currently below 0, indicating that more investors are bearish on stocks than bullish at the moment.
“While not at an extremely bearish reading, it’s currently lower than 54% of the time since 2020 and much more conservative than when this crisis began just a couple weeks ago,” Paulsen said of the gauge.
4. Economic news sentiment looks like it could be at a bottom
Economic news sentiment has also plummeted recently, another contrarian signal that has been associated with a rebound in stocks, Paulsen said.
The San Francisco Fed’s Daily News Sentiment Index has declined to a level of -0.11, its lowest reading since the start of the year.
“Although the adjustment to a sudden downward shift in economic news is usually not pleasant for stock investors, once investors adjust to the most recent change in the news, much of the stock market carnage is generally over,” Paulsen said.
5. Cyclicals are underperforming defensives
Cyclical stock sectors in the S&P 500 are currently lagging behind defensive stocks in the index. That dynamic has only emerged seven times since the Great Financial Crisis, with the S&P 500 being near a “major low” in every instance, Paulsen said.
When cyclicals are lagging significantly behind defensive stocks, that’s typically a sign the S&P 500 is “safe” for investors to purchase again, Paulsen noted.
6. The market’s put-call ratio is rising
The market’s put-call ratio, a measure of how many bearish put options that traders have placed versus bullish call options, has moved higher in recent weeks. That can be a contrarian signal that suggests a positive inflection in stock prices, Paulsen suggested.
“During difficult times in the stock market, the put/call ratio typically begins adjusting higher,” Paulsen said, adding that when the ratio moved meaningfully higher, it typically indicated it was a “good time” to purchase the S&P 500.
“Is this adjustment by investors indicating yet another S&P 500 rally is nearing?” he added.