CICC: Has the market "bottomed out"?

The Iran conflict has entered its fifth week, and the evolution path is more complex and prolonged than the market initially anticipated. Last week, the market briefly traded on the “TACO” narrative and expectations of de-escalation, resulting in a pullback in oil prices; however, on Friday, the conflict escalated again, indicating that there is still considerable distance to go before true de-escalation, and the road to de-escalation may not be smooth.

In this context, the performance of different assets has also shown significant divergence; U.S. Treasuries and gold have limited volatility, even showing a slight rebound, while equity markets like U.S. stocks have started to “catch up” with earlier declines. This aligns with our findings in last week’s report, “Has the Market Fully Priced in Iran Risk?” which concluded that bonds and gold are pricing in more pessimistic expectations, while equity assets have not priced in this pessimism sufficiently.

At this point, the most pressing question for investors is: Has the market “bottomed out”? To answer this question, first, it is essential to observe whether the situation will escalate; second, even if the situation remains unclear, we can check if asset pricing has become sufficiently reflected; furthermore, the pricing differences among different assets and industries will also lead to significant variations in their “cost-performance ratio,” which are crucial references for investors to respond to the evolving situation and make allocation choices. This is also a key focus of our discussion in this article.

The direction of the Iran situation: April is a critical juncture, will it shift from “paper disturbances” in financial markets to “actual impacts” on real production

Although there are still enormous uncertainties regarding the direction of the Iran situation, there are two important observation points: one is April, and the other is production activities in Southeast Asia.

First, April is currently seen as a “watershed” for market expectations, with about a 40% probability that the situation will end by the end of April; otherwise, it will continue until after the end of June. As of March 29, Polymarket betting odds indicated that the market expected only a 2% probability of the conflict ending by the end of March, with approximately a 40% probability of it concluding before the end of April and about a 40% probability that the conflict will extend beyond the end of June. Market expectations for a “swift resolution” of the Iran situation have cooled significantly, and a more likely scenario is that the conflict will drag into late April or even longer.

Chart: Market expectations show about a 40% probability of ending by the end of April and about a 40% probability of continuing until after the end of June

Source: Polymarket, CICC Research Department

Second, April is also an important juncture for whether the situation will escalate further. Trump has postponed actions against Iranian energy facilities by ten days to April 7. Furthermore, the delay of a meeting originally scheduled for March 31 to April 2, now set for May 14-15, also serves as a side confirmation that, at least “from Trump’s perspective,” he believes he can largely extricate himself from the Iran situation by then, indicating that April is relatively critical.

More importantly, by early April, oil tankers across East Asia will enter a state of insufficient supply. Based on the typical economic cruising speed of VLCCs (Very Large Crude Carriers) of about 12-14 knots, the one-way travel time from the main loading ports in the Persian Gulf through the Strait of Hormuz to various locations in East Asia is usually between 10 and over 20 days (about 16 days to the Malacca Strait, about 20 days to China’s eastern coast, and about 24 days to Japan). Considering loading and unloading dock times and port scheduling, the total cycle could approach a month. This means that tankers that passed through the Strait of Hormuz before the outbreak of the Iran situation at the end of February are likely to have already reached their destinations, and by late March to early April, the supply will be insufficient. Although offshore floating storage, strategic reserves, and alternative sources can serve as buffers, if the Strait of Hormuz remains fully blocked in early April, the risks of tightening supply or even localized shortages will become a reality.

Chart: Based on VLCC’s typical cruising speed of about 12-14 knots, it is estimated that travel time from the Strait of Hormuz to major East Asian ports will be 10-20 days

Source: hiFleet, CICC Research Department

In this context, the Southeast Asian countries, which have relatively low reserves and are highly dependent on overseas supplies, are a “weak link” that needs special attention. Currently, multiple countries, including Thailand, Vietnam, Indonesia, and the Philippines, have begun implementing work-from-home policies; Myanmar has implemented odd-even traffic restrictions, and a major supplier in Cambodia has announced a halt to liquefied petroleum gas supplies. Major Southeast Asian countries, which have been key destinations for Chinese exports over the past two years, have also become important links in the supply chain and production processes following the escalation of trade frictions; hence, countries like Vietnam are prioritizing energy for production as much as possible.

Chart: Insufficient crude oil reserves in Southeast Asian countries

Source: CICC Research Department

Chart: Southeast Asia has been a major destination for Chinese exports over the past two years

Source: Haver, CICC Research Department

Imagine if energy shortages lead to a decline or even a halt in industrial production activities in Southeast Asian countries, it could greatly impact the market’s expectations for the global economic outlook and China’s external demand resilience, quickly transforming the current “paper disturbances” in financial market trading and expectations into “actual impacts” on economic production activities, leading to stagflation or even recession trading.

Differences in asset pricing: Bonds, gold, and copper are relatively pessimistic; equity markets generally do not adequately price in pessimistic scenarios

Compared to the unclear situation itself, the extent to which asset pricing is sufficient is more easily grasped and is a key lever for us to take countermeasures.

As we analyzed in “Has the Market Fully Priced in Iran Risk?”, the reference benchmark and bridge for our calculations is the Federal Reserve’s interest rate cut expectations. Currently, CME interest rate futures have pushed the rate cut expectations to December 2027, and the delay in rate cut expectations may not be immediately intuitive; “translating” this into a judgment of the situation itself means that oil prices must remain consistently above $100, which implies that the conflict must persist into the second half of the year. In other words, as long as the conflict does not continue into the second half of the year and oil prices do not remain above $100, based on the current trajectory of U.S. inflation and actual growth, the Federal Reserve can still cut rates, even if the number of cuts is reduced or delayed. It is evident how pessimistic the current futures market’s expectations for the situation are.

Chart: CME interest rate futures have pushed rate cut expectations to December 2027

Source: CME, CICC Research Department

Chart: Based on the current trajectory of U.S. inflation and actual growth, the Federal Reserve can cut rates, even if the number of cuts is reduced and delayed

Source: Bloomberg, CICC Research Department

Using this as a reference, if we further break down the expectations factored into different assets, we can discover the differences in asset pricing. Specifically, the current expected rate of interest rate cuts over the next year for different assets is: Fed dot plot (-1x) > S&P 500 (-0.7x) > Nasdaq (-0.2x) > Gold (+0.1x) > Dow Jones (+0.3x) ≈ Interest rate futures (+0.3x) > U.S. Treasuries (+0.8x) > Copper (+0.9x).

Chart: Bonds, gold, and copper are relatively pessimistic; equity markets generally do not adequately price in pessimistic scenarios

Source: Bloomberg, CICC Research Department

In summary, bonds, gold, and copper are relatively pessimistic; equity markets generally do not adequately price in pessimistic scenarios (except for parts of the market like Hengke that have already declined significantly), which is consistent with the overall divergence in performance among different assets last week.

Has the market “bottomed out”? The pricing in the equity market for pessimistic scenarios may still be inadequate

Returning to the initial question, has the market “bottomed out”? This naturally depends on the evolution of the situation, but in conjunction with our breakdown of the sufficiency of pricing among different assets above, we can make the following judgment:

As long as the pessimistic scenario of the conflict continuing into the second half of the year, leading to oil prices remaining above $100, does not materialize, then assets that have factored in overly pessimistic expectations, such as U.S. Treasuries, gold, and even Hengke, have a “cost-performance ratio” for going long if the situation eases. While copper’s expectations are also quite pessimistic, it is impacted by demand, so it ranks relatively lower.

In this scenario, the downward pressure on equity assets would also be alleviated. However, the potential for upward movement will still require support from the fundamentals, assuming we do not consider scar effects. In other words, aside from certain markets like Hengke that have already seen significant declines, the absence of highly pessimistic expectations means that the cost-performance ratio and elasticity are also limited. Even without the disturbances from the Iran situation, we originally anticipated that China’s credit cycle might turn into an overall oscillation by 2026, thereby constraining the overall market space; this is also why we did not further raise our target levels when the market exuberantly reached our points at the beginning of the year. Additionally, the weak seasonality of the credit cycle in the second quarter may bring about short-term pressure, so some investors may choose to slightly reduce positions to wait for clearer circumstances before adding more, which is also a reasonable choice.

Chart: The credit cycle is expected to weaken in the second quarter

Source: Wind, CICC Research Department

Conversely, if the situation evolves toward a more pessimistic scenario, showing signs of further extension and impacting real production activities, the market may quickly trade in the direction of stagflation or even recession; at this time, although all assets may inevitably face varying degrees of impact, the equity market, which has not adequately priced in expectations, may bear greater pressure. At that point, only cash (U.S. dollars or reduced positions) and defensive positions (such as low-volatility dividends or low-priced stocks) may provide better protection.

The equity market’s general inadequacy in pricing pessimistic scenarios stems from two factors: first, there is still considerable expectation surrounding the “TACO” logic, which posits that Trump may still have room for compromise under the pressure of mid-term elections in the second half of the year; this is a reasonable speculation. Second, the impact of high oil prices and geopolitical shocks on profits also requires time to materialize; the pressure on the profit side is gradually transmitted through costs, demand, and order chains, and thus often lags behind valuations.

1) U.S. stock market: Under pessimistic scenarios, it may still face an 8-10% pullback space. The S&P 500 valuation still includes some rate cut expectations, and the impact of sustained high oil prices on profits has not been fully reflected. As we calculated in “Has the Market Fully Priced in Iran Risk?”, if the situation continues to escalate, U.S. stocks could face around a 10% pullback. The “catch-up” in U.S. stocks last week also preliminarily validated our view. Of course, if the conflict ends within the second quarter, valuations may recover, but the pressure from rising oil prices in the first half of the year will still weigh on profits, leading us to adjust the S&P 500 year-end target from 7600-7800 down to 7100-7200.

Chart: If the conflict ends within the second quarter, we will slightly adjust the S&P 500 year-end target down to 7100-7200

Source: Bloomberg, CICC Research Department

2) Chinese market: A-shares and Hong Kong stocks also do not fully price in pessimistic scenarios. On one hand, the suppression of valuations by U.S. Treasury yields and dollar fluctuations has not been completely reflected, especially for the more liquidity-sensitive Hong Kong stocks and A-share growth style and small-cap stocks; on the other hand, if disruptions from a closed Strait of Hormuz further impact production activities in Southeast Asia, and recession expectations rise, this will also transmit through demand logic, following the order of “external demand - cycle - technology”: under falling global demand, the space for domestic pricing advantages will shrink, and the export chain may come under pressure first, such as in chemicals and engineering machinery; subsequently, pressure will further spread through demand and supply to cyclical goods like copper and aluminum; finally, it will affect the technology sector’s valuations through interest rates and risk preferences. The current adjustments in certain export chains and cyclical sectors have already reflected the beginning of this transmission path, but the pessimistic scenario has not been fully priced in at the index level.

Chart: Hong Kong stocks and tech stocks, which are more sensitive to liquidity, have declined more

Note: Data as of March 27, 2026 Source: Wind, CICC Research Department

We estimate that if the situation continues to escalate, and oil prices remain at high levels of around $100 in the third or fourth quarters, the likelihood of the Federal Reserve cutting rates this year will significantly decrease. Assuming the Federal Reserve does not cut rates this year, the corresponding year-end U.S. Treasury yield will be 4.2%; if the oil price center rises by 50% and the price transmission coefficient is estimated at 0.5, then corporate profits may decline by 12.5%; the risk premium increase can be referenced from the changes before and after the normalization of the Russia-Ukraine conflict, then the Hang Seng Tech Index may fall about 4% to 4500-4600 points, and the Hang Seng Index may drop about 7% to around 23000 points; different indices in the A-share market may also face varying levels of pressure depending on their valuations and profit exposures.

Chart: The Hang Seng Index baseline is maintained at 28,000-29,000

Source: Bloomberg, CICC Research Department

How to allocate and respond? Left-side layout for assets with sufficient pricing, holding benefiting assets but not chasing higher prices, and using low-volatility dividends or reduced positions to hedge against volatility

The Iran situation remains unclear, but we believe the following premises have a certain level of confidence: First, in the short term, especially in April, the situation is likely to remain volatile, and market expectations will oscillate back and forth, so volatility will not end quickly, and phase upgrades cannot be ruled out. Second, however, from a medium-term view, a complete loss of control of the situation is not the baseline scenario. Third, even without considering the Iran situation, the second quarter is inherently a relatively weak phase in China’s credit cycle.

Chart: The weak seasonality of the credit cycle in the second quarter may also bring about short-term pressure

Source: Wind, CICC Research Department

In this context, a more effective allocation strategy is to start from the probability of success and odds, seeking assets with a higher cost-performance ratio, with three specific countermeasures:

If positions are low, one can left-side layout assets that have fully reflected pessimistic expectations, are highly correlated with interest rates and risk preferences, and are at low valuations after deep adjustments, such as Hang Seng Tech, gold, and innovative pharmaceuticals. These types of assets may not be the strongest in the short term, but because market expectations are already sufficiently low, the space for further declines is also relatively limited. Once the situation eases or the extreme scenarios do not materialize, they are more likely to recover first. From the allocation perspective, these types of assets are suitable for gradual left-side layout.

Chart: Hang Seng Tech dynamic P/E is at one standard deviation below the mean

Source: Bloomberg, CICC Research Department

If positions are high, one can appropriately reduce positions amid short-term disturbances, or allocate to defensive low-volatility dividend assets as a hedge against volatility. The second quarter is inherently weak in the credit cycle, combined with external geopolitical shocks and uncertainties in external demand, the overall market has not priced in overly pessimistic expectations; therefore, moderately reducing positions can avoid potential volatility without missing too much. Banks, public utilities, and some stable cash flow and strong dividend certainty dividend assets can serve as a base to bear defensive functions. Although these assets cannot provide high elasticity, they can reduce volatility and control drawdowns when the market struggles to form a consensus.

Holding sectors that benefit from supply shocks and energy security logic, such as energy storage and coal; this allocation logic is already a market consensus, crowded in trades, and is not advisable to chase too high. If energy prices remain high, and the market reinforces resource security and supply guarantees, these sectors will naturally attract fund attention and upward momentum. However, the issue is that the current expectations for these sectors are already quite high, and the fund clustering is also very evident, with trading crowding at historical percentiles of 100% over the past year; the subsequent odds and logical strength may not be equivalent. Moreover, if high oil prices lead to increases in fertilizer and food prices, agricultural products can also be gradually monitored.

From a purely quantifiable data-driven short-term rotation perspective, our quantitative industry rotation scoring model shows that short-term technology hardware, internet, chemicals, building materials, and steel are performing well in terms of profit valuations and funding trading dimensions, making them priority choices for layout; meanwhile, banks, biotechnology, and non-ferrous sectors have strong fundamentals but lower funding trading scores, which can be continually monitored for opportunities, more suitable as medium-term base assets or left-side allocations; in contrast, coal, oil and gas, and public utilities are somewhat crowded in the short term. It should be noted that this model purely reflects sector status based on short-term data and is more suitable as auxiliary reference outside long-term fundamental logic; for instance, when the boom direction is overly crowded in the short term, it is also advisable not to chase too high.

Chart: Innovative pharmaceuticals and non-ferrous metals for left-side layout, coal and energy storage to hold but with lower cost-performance ratios for adding positions

Source: FactSet, Wind, CICC Research Department

This article is sourced from CICC Insights

Risk Warning and Disclaimer

        The market has risks, and investments require caution. This article does not constitute personal investment advice and does not take into account the specific investment goals, financial situation, or needs of individual users. Users should consider whether any opinions, viewpoints, or conclusions in this article align with their specific circumstances. Investing based on this carries personal responsibility.