It's too early to pop the champagne. Despite encouraging headlines from the Middle East about talks, the armed conflict continues. Iranian rockets struck Tel Aviv, Saudi Arabia is reportedly considering joining a US-Israel coalition, and Washington plans to deploy roughly 3,000 troops from the elite 82nd Airborne Division to the region. A ground operation cannot be ruled out, which has forced the S&P 500 to hit the brakes after its earlier run driven by expectations of a quick deal.

Performance of US equity indices

One of the main drivers of the double-digit rallies in the broad equity index each year in 2023–2025 was retail investors. They actively bought the dips, which supported S&P 500 gains. The Middle East conflict has significantly changed their outlook.

According to Vanda Research, on March 23, the crowd was a net seller of US equities for the first time since 2023. JP Morgan's research shows that retail flows into individual stocks and ETFs have declined by 43% since the start of the Middle East conflict. Citadel Securities went so far as to say retail flows have died.

Dynamics of retail flows into stocks and funds

However, nothing lasts forever. If talks between the US and Iran prove constructive, reopening the Strait of Hormuz would lower oil prices and bring retail investors back to the market. That's what happened in 2022, when retail activity fell sharply after the outbreak of the war in Ukraine but later returned to buying the dips. That supported the S&P 500.

History repeats: de-escalation of geopolitical tensions in the Middle East would turn a headwind for the broad index into a tailwind.

For now, however, investors prefer caution. Even amid the S&P 500 rally at the start of the week through April 27, the VIX volatility index has not budged. That indicates the market is not rushing to move from fear to greed. It wants further proof that the war in Iran is over. Even though the US sent a 15-point list of demands, including preventing the development of nuclear weapons, Tehran said that the bar for dialogue is high.

The S&P 500 welcomes the drop in oil prices. The longer Brent and WTI remain elevated, the greater the stagflation risk in the United States. Signs of this are showing up in a slowdown in US business activity to its lowest level since April and in an acceleration of the PMI price component to a 10-month high.

Technically, the daily S&P 500 chart shows bears attempting to play out the pin bar. To remain in previously established short positions, the broad index needs to hold below the pivot level of 6,555. Conversely, a move above that level and a new local high at 6,595 would argue for a return to buy-side positioning.