Wall Street veteran Ardney under the shadow of war: The probability of a US stock market crash this year rises to 35%, while the chance of a rally drops to only 5%

Wall Street veteran strategist Ed Yarden has updated his outlook on the so-called “Era of Rapid Change,” believing that as the Iran conflict continues to escalate and impact global markets, the risk of a sharp sell-off in the U.S. stock market this year is increasing. Yarden has raised the probability of a stock market crash in the remaining months of this year from 20% to 35%. At the same time, he has significantly lowered the likelihood of a stock market rally driven more by investor enthusiasm than fundamentals, from 20% to just 5%.

This adjustment reflects growing concerns—if the Middle East conflict persists, coupled with inflation shocks, it could squeeze household spending, erode corporate profit margins, and complicate the Federal Reserve’s policy path. On Monday, international oil prices broke above $100 per barrel for the first time since 2022, causing both the stock market and U.S. Treasuries to decline simultaneously.

Yarden stated, “The U.S. economy and stock market are currently caught between Iran and a dilemma. The Federal Reserve is in the same boat. If the oil shock continues, the Fed’s dual mandate will be in trouble—on one hand, the risk of rising inflation increases; on the other, the risk of rising unemployment.” Data released last Friday showed that U.S. non-farm payrolls unexpectedly decreased by 92,000 in February, with the unemployment rate rising slightly to 4.4%.

One clear winner is the dollar. Over the past week, the dollar has nearly appreciated against all major currencies, while other safe-haven assets—including U.S. Treasuries, the Japanese yen, the Swiss franc, and gold—have declined. During Asian morning trading on Monday, S&P 500 futures fell 1.6%, indicating new pressure on the stock market, while hedge funds are increasing their short bets on U.S. stocks.

Yarden has previously made successful market calls. In December last year, he recommended reducing holdings in the so-called “Magnificent Seven” stocks relative to the broader S&P 500. However, his baseline scenario remains unchanged. The so-called “Roaring 2020s” scenario—where the U.S. economy experiences strong and sustainable growth driven by rapid productivity gains—still has a 60% probability of occurring by the end of this year.

Looking at a longer-term cycle, the outlook appears more optimistic. Yarden believes there is an 85% chance that the “Roaring 2020s” will continue. At the same time, he also sees a 15% chance of a replay of 1970s-style stagflation. He wrote, “If investors start to expect stagflation, the likelihood of a bear market will increase.”