Investing.com -- JPMorgan cut its year-end 2026 S&P 500 target to 7,200 from 7,500 in a note Thursday, warning that markets are underestimating the risks from the Middle East conflict, surging oil prices and investor complacency.

Analyst Dubravko Lakos-Bujas told investors that the index has been “relatively resilient (down only ~3%) even as oil prices have surged by over 40%,” aided by flight-to-quality flows into U.S. assets.

However, he warned that “investors have been mostly hedging rather than de-risking, with gross leverage still near highs (~95%tile).”

JPMorgan believes markets are assigning “a low probability to a potential demand hit” by assuming a quick resolution to the conflict and a reopening of the Strait.

The bank called this “a high-risk assumption,” noting oil-equity correlations turn increasingly negative after a 30 percent spike in crude.

Oil supply shut-ins have climbed to “8mb/d, the highest in history,” and JPMorgan expects cuts could reach 12 million barrels per day, roughly 11 percent of global production.

The firm argues the core risk is not inflation, but a negative transmission mechanism into demand if the disruption persists, forcing “GDP, demand, and revenues [to] adjust lower through forced demand destruction.”

If oil stays near $110, consensus S&P 500 earnings estimates could fall by 2 to 5 percent, the bank said.

Lakos-Bujas added that the market already faces pressure from private-credit stress, signs of fading AI enthusiasm and “low consumer affordability.” If the index breaks below its 200-day moving average, JPMorgan sees limited support until 6,000–6,200.

The bank continues to favor Low Volatility and Quality Growth stocks and highlighted Defense, Energy, Utilities, Materials, Cybersecurity and Hyperscalers as preferred sectors.