Iran War: Stocks sink to start the week as oil prices rise
Speakers
Summary
- The market is in a "discovery process" regarding the Iran conflict; institutional passive equity funds have begun retreating, signaling it is not just retail fatigue.
- While S&P 500 valuations have compressed from peak levels to ~25x forward earnings, they remain above the market-cap-weighted average of 19x, suggesting potential downside risk remains.
- Contrarian Insight: Despite the obvious link between war and Energy stocks, RBC's models find the Healthcare sector (specifically Pharma and Equipment) to be a more compelling "Overweight" because it combines defensive resilience with a historical tendency to outperform during oil shocks.
Trade Ideas
Institutional passive equity funds are retreating, and while sentiment (AAI net bulls) has dropped, it hasn't yet hit the "four-week average" trigger that typically signals a bottom. Valuations are ~25x, still above the 19x average. The market is currently in a "discovery process" regarding the war's duration. Buying the dip immediately is premature because institutional flows are still negative and valuations haven't fully reset to historical norms. WATCH. Wait for sentiment to hit extreme bearish levels (contrarian buy signal) or valuations to compress further before entering new long positions. Missing a "V-shaped" recovery if the geopolitical situation resolves faster than anticipated.
Lori Calvasina
Head of U.S. Equity Strategy, RBC Capital Markets
RBC is "overweight" the Healthcare sector. Calvasina notes that during oil crises, "both the pharma group and the health care equipment and services group tend to outperform." When geopolitical risk rises, capital rotates out of high-beta tech and into defensive sectors with stable earnings. Healthcare offers a dual benefit: it acts as a safe haven (defensive) and currently possesses "good valuation appeal" relative to the broader index. LONG Healthcare (XLV) and specifically Pharmaceuticals (XPH) and Medical Devices (IHI) as a hedge against geopolitical volatility. A rapid de-escalation in the Middle East could trigger a "risk-on" rotation back into Tech, causing defensive sectors to lag.
Lori Calvasina
Head of U.S. Equity Strategy, RBC Capital Markets
While RBC is officially neutral on the sector, Calvasina admits their valuation model shows Energy "still looks a little bit attractive" and notes it "tends to outperform and go up when oil prices are rising." The conflict involving Iran directly threatens global oil supply. As spot oil prices rise, energy equities (which have lagged spot prices) will likely catch up to reflect higher realized margins for producers. LONG Energy producers to capture the inflation in oil prices caused by the conflict. If the conflict is short-lived or supply is not materially disrupted, the "war premium" in oil prices will evaporate quickly.
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This Bloomberg Markets video, published March 02, 2026, features Lori Calvasina discussing SPY, XLV, XPH, IHI, XLE. 3 trade ideas extracted by AI with direction and confidence scoring.