Wall Street Prophet Yardeni: Oil Price Shock Could Trigger 'Stagflation of the 1970s', U.S. Recession Probability Rises to 35%

As the war between the United States and Israel against Iran enters its second week, oil prices continue to rise. Senior Wall Street strategist Ed Yardeni significantly downgrades the optimistic outlook for U.S. stocks, warning that the market is approaching a bear market threshold.

Yardeni raises the probability of a U.S. recession in 2026 from 20% to 35%, while sharply reducing the likelihood of a “melt-up” scenario in the stock market from 20% to 5%.

In a research report released last Sunday, he wrote that the oil price shock will not subside until the Strait of Hormuz reopens. “Until then, financial markets may become increasingly concerned about a stagflation scenario reminiscent of the 1970s—an era marked by stagflation accompanied by two recessions.”

Market sentiment is clearly under pressure. S&P 500 futures fell more than 2% during Asian trading hours but later recovered some losses. The VIX volatility index surged to its highest level since April’s tariff turmoil, prompting hedge funds to increase short positions in U.S. stock ETFs. The 10-year U.S. Treasury yield rose 4 basis points to 4.18%.

Oil prices dominate market sentiment, sharply increasing stagflation risk

Yardeni points out that current oil prices are the main factor influencing market sentiment. The surge in energy prices impacts the economy through two channels: directly increasing consumer spending costs and raising corporate production and transportation costs, thereby intensifying overall inflationary pressures. When inflation rises while economic growth is constrained, the risk of stagflation emerges.

On the prediction platform Polymarket, the probability of a U.S. recession in 2026 has jumped from 22% last week to 34%, confirming that market concerns about stagflation are rapidly intensifying.

Yardeni notes that the surge in oil futures is accompanied by rising U.S. Treasury yields, a strengthening dollar, and falling gold prices—all signals that suppress market risk appetite. The dollar has become the preferred safe-haven asset in this conflict, with the Bloomberg Dollar Spot Index rising nearly 2% since the outbreak of war.

“Currently, the economy and U.S. stock market are caught between the Iran situation and difficult circumstances,” Yardeni wrote. “If the oil price shock persists, the Federal Reserve’s dual mandate will face a dilemma—both inflation and unemployment pressures will intensify.”

S&P 500 and Nasdaq face risk of losing technical support

From a technical perspective, Yardeni believes the S&P 500 and Nasdaq 100 are in a precarious position. He estimates that both major indices could soon break below their respective 200-day moving averages—an important long-term technical support level.

Last week, Yardeni warned that, due to the Middle East conflict, the S&P 500 faces a 10% to 15% correction risk. The further surge in oil prices has made him more cautious.

“We cannot rule out the possibility of a bear market or even a recession now,” he said. “It all depends on how long the Strait of Hormuz remains blocked.” Generally, a 20% decline from recent highs constitutes a technical bear market.

Last week, the S&P 500 fell 2%, while the broader global stock index MSCI World declined 3.7%. In contrast, the resilience of the U.S. market is partly due to its higher energy self-sufficiency, and earlier concerns about AI spending and business disruptions have already been priced in, providing some upward support.

Bond market safe-haven logic also faces challenges

In a stagflation scenario, the traditional safe-haven role of the bond market may also falter. Yardeni notes that the 10-year U.S. Treasury yield has remained unusually calm over the past year, fluctuating within a 4.00% to 4.25% range.

“An oil price surge could break this calm and push yields higher,” he said. Currently, the market has delayed expectations for the Fed to cut interest rates by 25 basis points until September.

President Trump stated on Sunday night that the short-term pain caused by military action against Iran is worth it, calling the $100 oil price a “small price to pay.” His comments further fueled concerns about the ongoing conflict.

Extreme market pessimism may present a contrarian buying opportunity

Despite issuing multiple warnings, Yardeni has not completely abandoned his medium-term optimism. He maintains his baseline scenario of a “roaring 2020s,” believing there is a 60% chance that the U.S. economy will continue steady expansion supported by strong productivity growth, with an 85% probability of this trend persisting over the next decade. He assigns a 15% probability to a repeat of 1970s stagflation.

Notably, Yardeni also states that he is preparing for the possibility that overly pessimistic market sentiment could create buying opportunities. “As we have previously pointed out, geopolitical crises often create buying opportunities in stocks,” he wrote. “In the coming days, bearish sentiment may spike sharply, which could serve as a contrarian buy signal.”

Yardeni’s past market calls have a track record. In December last year, he advised underweighting the “Big Seven” tech giants in the S&P 500, and since then, the tech sector has significantly underperformed the broader market.

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