MW The stock market is still priced for 'absolute chaos,' but the worst-case scenario will be avoided, Nomura strategist predicts

By Barbara Kollmeyer

Charlie McElligott offers up three paths for markets

The Iran conflict has investors pricing in plenty of fear, a Nomura strategist said.

Wall Street traders who have been pricing in "absolute chaos" for markets as the Iran conflict enters its second week are likely to end up disappointed barring a dramatic turn of events.

That's according to Nomura strategist Charlie McElligott, who laid out three possible paths for stocks in an extralong note to clients on Monday.

"Welcome to the terrordome," he wrote, in reference to a weekend of escalating conflict and no sign of progress on getting the vital Strait of Hormuz back open. The fallout has crude oil (CL00 )at above $100 a barrel, stocks DJIA slumping anew and the Cboe Volatility Index VIX at levels not seen since the April 2025 tariff tantrums.

McElligott's first scenario - "nothing ever happens" - sees oil tankers starting to get through the strait, which is currently all but closed; limited infrastructure damage to major producers; and the U.S. and other Group of Seven countries releasing strategic oil reserves to ease pressure on energy prices.

Such a scenario would see stock prices rally as all those investors who have been taking out insurance against a meltdown are forced back into equities, he said.

His second worst-case scenario centers on an "explosive" event, such as a massive crude tanker getting hit, failed military action with casualties or oil-reserve releases that end up being easily absorbed by the market. In this case, the downside protection being bought by traders and investors would light a fuse under already rattled markets, causing a major selloff.

McElligott, however, is placing his bets on a third possible outcome, one that he believes is already underway. "The most perverse scenario ... is a further equities grind sideways to slightly down, but no crash/no shocks," he said.

That's a situation in which shares of the group of megacap tech companies known as the "Magnificent Seven" and other AI stocks are unable to drive markets to new highs, and the other 490 cyclical-to-defense stocks can't get the job done either, he said.

While sidestepping disaster, in this scenario markets struggle to get anywhere because cyclical stocks are dragged down by an economy left weaker by the Iran conflict. But the fact that these investors must now unwind their hedges could help keep the market off the precipice by requiring some forced buying.

One sign that this latter scenario is already playing out is the fact that the Cboe Volatility Index, better known as the VIX or Wall Street's "fear gauge," has seen a much more dramatic move than the drop in the S&P 500 would suggest.

In the past, such a setup has seen the VIX get "smoked going forward," unless an actual economic crisis materializes and justifies buying that protection. The 2008 financial crisis and the pandemic shock in 2020 were two rare times when the VIX just kept moving higher.

McElligott said that even if G-7 finance ministers manage a release of strategic oil reserves on Monday, markets are starting to price in a "wrong-way" reset on interest rates headed higher to fight inflation, as soaring commodity prices pressure central banks to act. However, McElligott believes fears are focused on possible hikes by the European Central Bank and the Bank of England, not the Federal Reserve.

Read: G-7 hasn't yet agreed on deploying unprecedented oil reserves as prices soar

The S&P 500 SPX was down another 1% on Monday after a 2% drop last week, while the Dow Jones Industrial Average DJIA was off 589 points.

-Barbara Kollmeyer

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March 09, 2026 11:48 ET (15:48 GMT)

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