After the "ceasefire", the stock market has surged, but Wall Street's expectations have already changed.

The news of the ceasefire in the Middle East briefly boosted risk assets, but Wall Street strategists warn that this war has left difficult-to-bridge traumas in terms of inflation, energy supply, and the policy space of the Federal Reserve. This week, the benchmark stock indexes in the US rose, with the S&P 500 index recording a cumulative increase of 3.6%, the largest weekly gain since late November of last year. However, the upward trend in the S&P started showing signs of fatigue and fell after the midday on Friday. The market is concerned about whether the peace talks over the weekend can end the six-week-long war that has deeply impacted the economy. This volatility has forced Wall Street strategists to reassess their optimistic predictions for the beginning of the year. The impact of oil prices has led to the largest monthly inflation increase since 2022, consumer confidence has dropped to historic lows, and traders' expectations for a rate cut by the Federal Reserve this year have nearly dissipated. Strategists have generally raised their inflation expectations and shifted the timetable for rate cuts. Many strategists stated that they did not include the conflict in the Middle East in their baseline scenarios before and are currently stress testing their target prices and rate paths. David Kelly, Chief Global Strategist at JPMorgan Asset Management, admitted, "We did not anticipate the conflict in the Middle East at the beginning of the year, nor did we expect gasoline prices in the US to skyrocket to over $4 per gallon." He predicts that year-on-year inflation may reach 4% this summer, significantly delaying the Federal Reserve's return to the neutral rate (around 3%). However, he remains relatively optimistic, believing that inflation pressures are mostly due to temporary factors, and inflation is expected to fall below 2% next year, at which point the Federal Reserve could cut rates once or twice. Alexandra Wilson-Elizondo, Co-Head of Global Fixed Income at Goldman Sachs Asset Management, expects the Federal Reserve to maintain a "clearly wait-and-see" stance until the direction of growth and inflation is clearer, but she still expects one rate cut this year. She also pointed out that for the European Central Bank, which has a single mandate to maintain price stability, it may be forced to raise rates instead. Ann Miletti, Stock Investment Director at Allspring Global Investments, initially expected the Federal Reserve to cut rates twice this year but has now postponed one rate cut until 2027. She said, "The slowdown in growth is greater than we expected, and the upward momentum in inflation is also stronger than expected." Divergence in risk assets intensifies, while fixed income and credit markets are under scrutiny. As short-term US Treasury yields rise, some strategists are looking for opportunities in the fixed income space. Wilson-Elizondo pointed out that the two-year US Treasury yield has risen nearly 50 basis points to around 3.8% since the start of the war. She said, "The market has created opportunities for us to reposition fixed income, especially in the US market." She also warned that corporate credit faces more pricing pressure for risk repricing, "the credit cycle seems to be turning." Last month, the BlackRock Investment Institute adjusted its overweight position in risk assets to neutral. Director Jean Boivin said, "We may return to a preference for risk assets or conclude that the damage caused by supply shocks and stagflation will dominate future trends." BlackRock maintains a underweight position on long-term US Treasuries and favors European bonds, expecting long-term interest rates to continue rising. Julian Emanuel, Chief Stock and Quantitative Strategist at Evercore ISI, is relatively optimistic, citing factors such as stable profits and controllable bond yields to support his judgment, but he stressed that oil prices are a key variable. He said, "If WTI crude oil can remain stable below $90 for the rest of the year, the stock market should perform well." The adjustment of target prices by various institutions coexists with both stability and downward revisions. Most institutions are currently choosing to temporarily maintain their full-year target prices, but their reasons and confidence vary. Luca Paolini, Chief Strategist at Pictet Asset Management, said that the team that was close to adjusting positions due to the ceasefire news on Tuesday has paused their actions for now. The current forecast is for the S&P 500 to close at 7250 points at the end of the year, European stock markets to increase by about 10%, and the 10-year US Treasury yield to fall below 4.25%. Pictet expects the Federal Reserve and the Bank of England to each cut rates once, while the European Central Bank stays put. Scott Chronert, Head of US Equity Strategy at Citigroup, maintains his optimistic outlook released in mid-December, stating that "most of the current situation seems transitional." However, he admits that risks cannot be ignored, including the ongoing high oil prices leading to long-term high interest rates, pressure on the private credit market, and potential disruptions from AI impacts and Trump's tariff policy. He pointed out that the upward revision of earnings expectations is concentrated on a few large-cap stocks such as Nvidia and Broadcom, and the market rotation process has been clearly hindered. He said, "This is a market that is still searching for direction, and making a clear judgment now is premature." Wells Fargo is one of the few institutions to lower their full-year forecasts, reducing the S&P 500 target price from 7800 points to 7300 points. Chief Equity Strategist Ohsung Kwon believes that the current economy is less sensitive to oil prices than in past cycles, and tax refunds will partially offset pressure on consumer spending. However, Kwon added, "Unless we see a clear deterioration driven by profits, we still expect the stock market to perform steadily throughout the year." This article is from "Wall Street News", written by Ye Long Bao, GMTEight Editor: Li Cheng.