Expectations of a U.S. recession have risen notably since the escalation of conflict in the Middle East, as investors grow more concerned about the economic consequences of higher energy prices and geopolitical instability. U.S. stock futures were lower in early Monday trading, with S&P 500 futures declining 1.4%.
Data from prediction platform Polymarket shows the probability of a U.S. recession this year increasing to 37% on Monday morning — the highest level in three months. The probability was just 21% on February 25, shortly before the conflict began.
Ed Yardeni, one of Wall Street’s more optimistic strategists, said the sudden surge in geopolitical tensions is prompting investors to reconsider the outlook for both the U.S. economy and equity markets.
In a note analyzing the potential effects of the conflict, Yardeni said that surging oil prices could trigger a pullback in equities even if economic growth continues.
“Spiking oil prices may precipitate a stock market correction rather than a bear market, but the latter is possible,” he wrote.
Yardeni added that his firm still sees the “Roaring 2020s” scenario as the most likely path for the U.S. economy this year, assigning it a 60% probability. However, the balance of possible outcomes has shifted significantly following the outbreak of the war.
“We are lowering the Meltup scenario from 20% to 5% and increasing the Meltdown scenario (which now includes a 1970s-style stagflation) from 20% to 35%,” Yardeni said, referring to his firm’s updated outlook for the rest of the year.
Historically, large spikes in oil prices have often been associated with recessions and bear markets. The sharp rise in crude following Russia’s invasion of Ukraine in 2022 was a notable exception. While the U.S. economy avoided a recession, equity markets still experienced a bear market.
Yardeni said the current surge in oil prices could again weigh on equities without necessarily causing a full economic downturn. A market correction of around 10% to 15% appears more probable than a prolonged bear market, though that outcome cannot be ruled out if investors start pricing in stagflation risks.
According to the strategist, the U.S. economy is now less exposed to energy shocks than in previous decades. Energy intensity has declined significantly as the economy has shifted away from manufacturing toward services, while improvements in fuel efficiency and technological progress have also reduced reliance on oil.
Domestic energy production has also expanded sharply. Total U.S. crude output — including natural gas liquids and renewable fuels — is now close to a record 24 million barrels per day, surpassing domestic consumption of roughly 21 million barrels per day and effectively making the country a net energy exporter.
Nevertheless, a prolonged disruption in energy markets could still shift investor sentiment. Yardeni cautioned that if markets begin to anticipate a return to stagflation similar to that experienced in the 1970s, the probability of a bear market would rise.