Investment bank says buy defense stocks, brace for $100 oil and 10% stock market correction

Published Mon, Apr 15 202411:02 AM EDTUpdated Mon, Apr 15 202411:38 AM EDT

Turmoil in the Middle East could cause dramatic moves in the financial markets, according to U.K. investment bank Liberum Capital , which is calling for oil to surge to $100 and a stock market correction as big as 10%. Iran launched more than 300 drones and missiles on Israel on Saturday, marking the first direct attack on Israel from Iranian territory. While the majority of the threats were intercepted, concerns arose that Israel might retaliate. "In our base case scenario of Israel retaliating but in a limited way that keeps the conflict from escalating further, this could lead to a 5-10% correction in the stock market together with further strength in the U.S. dollar," Liberum, founded in 2007, said in a note to clients. "The obvious short-term winners will be oil & gas stocks as well as defense contractors." Israel has vowed to retaliate due to the Iranian strike, which itself was carried out to avenge an alleged Israeli airstrike that killed several top Iranian commanders in Damascus, Syria, earlier in April. The stock market is already in the middle of a pullback amid lingering inflation concerns, rising Treasury yields and a shifting outlook for Federal Reserve interest rate policy. The S & P 500 ended last week lower by about 1.5%, its worst weekly performance since October 2023. The equity benchmark is now about 2.7% off its 52-week high. Oil prices were slightly lower Monday as Israel, aided by the U.S., fended off Iran's aerial barrage. The West Texas Intermediate contract for May lost 99 cents to $84.67 a barrel. WTI futures began the year around $71 a barrel. "As the heightened uncertainty is likely to persist, we think the stock market rally will take a temporary break for now while oil prices might surpass $100/bbl," Liberum said. The investment bank believes aerospace and defense stocks could outperform in the short run in light of growing geopolitical risks. The biggest ETF in the industry is the iShares U.S. Aerospace & Defense ETF (ITA) , with about $5 billion in assets under management. Invesco Aerospace & Defense ETF (PPA ) and SPDR S & P Aerospace & Defense ETF (XAR) are two other popular offerings. Liberum thinks the stock market could quickly reverse any losses as soon as the tensions in the Middle East ease. "Once it becomes clear that the conflict will not escalate in an all-out war between Iran and Israel with involvement of the U.S., stock markets should recover, and oil prices should retreat," the firm said. — CNBC's Michael Bloom contributed reporting.