U.S. stocks are faring worse than during past geopolitical shocks - and there's plenty of room for them to fall further

By Joseph Adinolfi

The S&P 500 is down 7.4% since the Iran conflict began - worse than the median 6.1% decline during previous geopolitical shocks

U.S. stocks have been hit hard by the Iran conflict in March.

When the Iran conflict broke out a month ago, many professional investors were betting that it would be short-lived. Their reasoning appeared to largely rest on historical precedent: When stocks retreat due to a geopolitical shock, they often recover within a matter of weeks, if not days.

See: Investors are now learning a painful lesson: Buying a dip driven by geopolitics isn't a slam dunk

The table below, produced by strategists at Deutsche Bank, became a kind of playbook. It showed that, on average, the S&P 500 SPX took 16 days to bottom following past geopolitical shocks. The average recovery took 109 days, although this figure was heavily skewed by the aftermath of the 1973 Arab oil embargo; after that episode, the S&P 500 needed more than five-and-a-half years to claw its way back.

Friday marked the 20th trading day since the Iran conflict began. Although Israel and the U.S. launched their attacks on Feb. 28., most investors didn't have an opportunity to trade on these developments until markets reopened for the March 2 session.

Since the market closed on Feb. 27, the S&P 500 has fallen 7.4%, according to the latest figures from FactSet. The below chart from a team at Deutsche Bank, shared with MarketWatch on Friday, shows that the index's decline has already surpassed the 6.1% median drawdown that followed previous geopolitical conflicts.

U.S. stocks bounced in early trading on Monday, as investors bought the dip following the latest comments from President Trump about progress in negotiations. But those gains failed to hold.

A team of strategists at Deutsche Bank said discretionary investors were already clearly underweight stocks, according to their in-house data - although they had room to further reduce their exposure.

Systematic strategies - a group that includes trend-following funds like commodity trading advisors - have cut their equity exposure to below neutral for the first time since July, the Deutsche Bank team noted. But these funds still have scope to reduce positioning further if there isn't an imminent rally, or if volatility picks up.

The Cboe Volatility Index VIX, better known as the VIX or Wall Street's "fear gauge," finished Monday's session north of 30, a level that typically indicates a heightened level of alarm.

The S&P 500 finished 0.4% lower at 6,343.72 on Monday, while the Nasdaq Composite COMP was off by 0.7% at 20,794.64. The Dow Jones Industrial Average DJIA gained 49.50 points, or 0.1%, at 45,216.14.

-Joseph Adinolfi

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03-30-26 1659ET