Oil shocks have historically triggered major market selloffs. Deutsche Bank says the Iran war is missing 3 key ingredients.

By Nora Redmond

Riskier assets like stocks are showing resilience against more significant selloffs

The factors that led to aggressive selloffs in riskier assets during past energy shocks are not currently in place, according to Deutsche Bank.

While some on Wall Street are starting to warn about the rising risk of a bigger stock-market correction, history shows that at least one of three major macroeconomic shocks is required for that to happen.

That's according to Deutsche Bank strategist Henry Allen, who argued that recent history has shown that riskier assets like stocks, commodities and currencies can resist more significant selloffs. But in a note to clients, he acknowledged some faltering of those assets in recent weeks as investors worry that the Strait of Hormuz could remain closed for some time.

Read: Investors are piling into U.S. equity funds at the fastest pace in years. But now the pendulum may swing back, warns Barclays.

But for a more "pronounced selloff," Allen said, history has shown that at least one of the following would need to happen: an oil shock that is sustained, data that is clearly in contractionary territory or aggressive central-bank tightening to deal with the situation. He argues that so far, it's a stretch to say any of those are happening.

With regard to oil, he referred to major crises of the past few decades, such as the 1973 Arab oil embargo that hit the U.S., causing prices to almost quadruple and stay there for years. And in 2022, when Russia launched its invasion of Ukraine, 12-month Brent futures briefly climbed above $100 a barrel.

Brent crude, the global benchmark (BRN00) (BRNN26), is still hovering around the $110-a-barrel mark, and West Texas Intermediate (CL.1) (CLM26), the U.S. benchmark, is holding firmly above $100 per barrel. At the same time, bettors on prediction market Polymarket are pricing in just a 31% chance that the Strait of Hormuz will reopen by the end of June and a 46% chance of it doing so by the end of July. (Polymarket has a data partnership with Dow Jones, the publisher of MarketWatch.)

Yet the war in Iran has been marked by a consistent gap between back-dated prices and 6-month futures.

As for the second red flag, weak data points, Allen noted that previous energy shocks have been accompanied by evidence such as the sharp and immediate rise in unemployment in 1973. But U.S. nonfarm payrolls grew by over 100,000 in March and April and the global purchasing managers index for April rose.

And while previous energy-price shocks have sometimes led central banks to embrace aggressive interest-rate hikes, the Federal Reserve, the European Central Bank and the Bank of Japan haven't raised rates since the conflict began, Allen argued.

That said, the recent surge in bond yields is starting to convince more investors that that the Fed will need to formulate its message about inflation risks stemming from higher oil prices.

Despite markets pricing in a continued conflict in the Middle East and an increased chance of stagflation, Allen pointed out that the S&P 500 SPX is close to 1.3% below its all-time high, as credit spreads in both the U.S. and Europe are tighter than when the war started at the end of February.

"So the resilience we've seen compared to past shocks makes more sense than it might appear at first glance," he said.

Read: Here are the stocks to buy - and avoid - to protect your portfolio against oil and yield shocks

-Nora Redmond

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05-19-26 1106ET