There may be more losses ahead for the S&P 500. Trading another pullback with options

Unfortunately for investors, the phrase “regime change” may become a nasty double entendre. In its classical geopolitical sense, it refers to the deliberate overthrow or fundamental alteration of a sovereign government’s structure, typically through external pressure, military action or internal upheaval. In financial markets, however, “regime change” denotes a structural break in prevailing economic conditions—resetting from one, typically range-bound baseline, to another. Examples include transitions from bull markets to bear markets, from disinflationary to inflationary environments, from falling rates/accommodative monetary policy to rising rates and a more restrictive one, or from chronic oil oversupply to sustained oil undersupply. In the worst case, many or all of these shifts might happen concurrently. As of late March, these two meanings have converged. Following the U.S.-Israeli strikes on February 28 that eliminated Supreme Leader Ali Khamenei and other key Iranian officials, the explicit pursuit of regime change in Tehran has simultaneously set in motion a cascade of regime changes across global financial markets. What began as an apparently opportunistic geopolitical operation now risks precipitating precisely the market dislocations that prudent investors and policymakers had sought to avoid: a formal equity bear market, resurgent inflation, elevated interest rates and a prolonged disruption in oil supply that reverses years of structural oversupply. The immediate catalyst was Iran’s retaliation. Tehran closed the Strait of Hormuz for the first time in modern history, effectively halting approximately 21% of global seaborne oil trade—the largest oil supply disruption in history. West Texas Intermediate crude surged from the mid-$50s in December — where it had languished amid record U.S. shale output and OPEC+ restraint — to the $100–$110 range. The Iranian attack on Qatar’s Ras Laffan Industrial City, about 50 miles northeast of Doha, which is the world’s largest LNG production facility, may have “knocked out 17% of Qatar’s LNG export capacity” for three to five years. The move was not merely tactical; it represented a deliberate strategy to impose asymmetric costs on the West. Markets, already pricing in heightened geopolitical risk premia, responded with textbook volatility. The S & P 500 has declined by approximately 7.4% over the 20 trading days since the strikes. The Nasdaq-100 formally entered technical correction territory, down over 11% since Jan. 28. Credit spreads widened, the VIX climbed above 31, and some safe-haven assets, such as gold , stabilized after steep declines and registered inflows. However, the greater concern is not the initial price shock but the risk of these disruptions becoming self-perpetuating regime shifts. First, consider the equity market. Throughout 2024 and 2025, U.S. equities followed a “soft-landing” regime characterized by resilient corporate earnings, slowing inflation, and expectations of Federal Reserve easing. That scenario is now at risk. A prolonged oil price rise above $100 directly reduces consumer spending and corporate profit margins, especially in energy-intensive industries like transportation, manufacturing, and chemicals. History provides useful lessons: the 1973 and 1979 oil shocks each led to bear markets lasting 20–24 months with stock declines over 40%. Current valuations—still high compared to long-term averages—offer limited room for error. At the same time, inflation dynamics are undergoing their own regime change whipsaw. After years of disinflationary pressures from globalization, productivity improvements, and technological efficiency gains— particularly in the US oil and gas business — the energy component of the consumer price index is reasserting dominance in a negative way. The stable inflation regime post-Volcker gave way to the supply shocks of Covid and the aggressive and excessive $2.2 trillion fiscal spending package of H.R. 5376, also known as the “Build Back Better Act”. Inflation rates soared to 40-year highs. In fact, inflation might have been even higher if the Biden administration hadn’t sold nearly 40% of the nation’s Strategic Petroleum Reserve to suppress gas prices ahead of the 2022 midterms. We’ll examine the supply-and-demand dynamics and why that politically motivated decision in 2022 has important economic and security implications for us now. Core PCE inflation had only recently (finally) stabilized near the Fed’s 2% objective, but once again it faces upside risks from higher transportation and production costs. Energy price pass-through to the headline CPI is well documented; each sustained $10 increase in oil prices typically adds 0.3–0.5 percentage points to annual inflation. With oil already up more than $30 from 2025 averages, consensus forecasts have revised 2026 headline inflation upward to 3.8%–4.2%. This is no longer a transitory supply shock; it is a structural regime change that challenges the disinflationary narrative underpinning post-pandemic monetary policy. We must acknowledge that the nation’s ability to respond to a legitimate global geopolitical threat to oil supplies—namely, Iran attacking producers and shutting down the Strait of Hormuz—is crucial. Of the more than 291 million barrels the Biden administration sold from the SPR to suppress prices, they bought back only 50 million barrels by the end of his term, leaving the SPR 52% below its all-time high and approximately where it was in mid-1984! The current administration has announced plans to release ~170 million barrels over the next 120 days, but that’s only about 8.5 times the volume that typically transits the Strait of Hormuz each day. Because the Strategic Petroleum Reserve (SPR) was already significantly depleted, we are ill-prepared for the exact kind of oil crisis we’re now beginning to experience. Notice that net of the announced release, the SPR will be at its lowest reported level in history, equating to about eleven days’ worth of U.S. average consumption. The Federal Reserve’s response introduces yet another layer of regime uncertainty. Throughout 2025, the central bank had signaled a gradual easing cycle predicated on declining inflation and stable growth. That path is now obstructed. Higher energy-driven inflation forces the FOMC to weigh the classic policy dilemma: accommodate to support growth or tighten to anchor expectations. Market-implied probabilities, as reflected in Fed funds futures, have already shifted dramatically. The probability of a rate cut by June has fallen from over 80% to below 30%, while the risk of a 25-basis-point hike has risen to 15%. Should inflation expectations de-anchor — as measured by the University of Michigan survey or five-year, five-year forward breakeven rates — the Fed may be compelled to maintain or even raise the federal funds rate into restrictive territory. Higher-for-longer interest rates would constitute a monetary regime change with profound consequences for asset prices, particularly duration-sensitive equities and real estate. Nowhere is the regime shift more pronounced than in oil markets themselves. For the better part of the past decade, global oil operated under an oversupply regime. U.S. shale flexibility, Saudi spare capacity, and episodic OPEC+ cuts kept prices range-bound between $60 and $80. That equilibrium has been shattered. Iran’s pre-strike production of roughly 3.2 million barrels per day is now largely offline, and the Strait of Hormuz disruption has removed an additional 17 million–19 million barrels per day from effective supply. Even a partial reopening would require weeks of demining and diplomatic negotiations. In the interim, inventories at Cushing and Rotterdam are drawing down at rates not seen since 2022. The forward curve, once comfortably in contango, has flipped into backwardation, signaling acute near-term scarcity. Analysts at major investment banks now forecast a structural undersupply regime persisting through 2027, with prices potentially testing $120–$130 in a worst-case scenario involving further escalation or Saudi retaliation. These interlocking regime changes are not independent; they compound one another. Higher oil prices fuel inflation. Inflation constrains monetary easing. Higher rates pressure equity valuations and tighten financial conditions. Higher prices and falling asset prices reduce consumer and business confidence, all resulting in a negative feedback loop that amplifies downside risks. Portfolio managers who had positioned for a “Goldilocks” environment — moderate growth, low inflation, falling rates—must now reoptimize under a stagflationary regime characterized by higher volatility, compressed multiples, and selective sector rotation toward energy, defense and commodities. If all of that wasn’t enough, the world is also undergoing a massive technological regime change that threatens the labor markets. The impact of AI is already being felt and is still in the early innings. Labor markets have been weakening; both new jobs data and revisions to prior periods are lower than in prior periods. Some of this may be AI. Some of it may relate to changes in minimum wage laws or other factors, but these were flashing warning signs well before this most recent conflict. The chart below reveals that the pace of post-pandemic job growth peaked in early/mid-2021, and has been declining consistently since. So the double entendre of “regime change” serves as both a warning and an analytical lens. The United States and Israel have pursued a high-stakes geopolitical objective in Iran with the explicit aim of reshaping regional power balances, but the unintended consequence may be an equally profound reshaping of financial market regimes. Investors, policymakers and corporate leaders shouldn’t treat these potential shifts as temporary noise. The irony is inescapable: in seeking to change the regime in Tehran, the West may have accelerated regime change on Wall Street and Washington. The coming quarters will determine whether this double entendre resolves in geopolitical success or macroeconomic regret. That leads to the key practical point: the deeper the pullback gets, the worse the conditional odds become. At 5%, history is still strongly on the side of “routine pullback.” At 10%, history becomes much more mixed. At 10%+, you should stop thinking of it as a garden-variety wobble and start treating it as a genuinely contested regime shift. Is this a dip to buy or sell? Since short-term returns have historically improved after a pullback, your first instinct might be to buy risk assets at a lower price. After a modest pullback, returns tend to be better than usual over the next 30-, 90-, and 180-day periods. However, pullbacks generally increase the likelihood of positive forward returns, unless they signal the start of a recession or a systemic bear market. That warning is very important. Trading a greater pullback Regarding the current Iran-war drawdown, I believe the chance that this marks the early phase of a genuine bear market is higher than the long-term average. The reason is that this sell-off is tied to an oil shock, rising inflation concerns, and lower expectations for Fed easing. As of March 27, the Dow had entered correction territory, the Nasdaq was already there, oil prices had surged, and markets were even pricing a significant chance of a Fed hike later this year. These conditions are not typical of a harmless sentiment shakeout; they represent a macroeconomic squeeze. The S & P will likely officially confirm the correction we’ve already observed in the Dow and Nasdaq. The current situation carries a 45%–55% chance of becoming a bear market, which is higher than market declines alone suggest. Essentially, this treats historical probabilities as the baseline and raises them based on the current oil, inflation and interest rate environment. The historical trend still shows that pullbacks typically lead to better long-term returns over 30-, 60-, and 90-day periods. However, in this case, the short-term boost from mean reversion is countered by the real risk that the shock shifts from geopolitics to inflation, then to policy, and ultimately to growth. If the S & P 500 were to formally enter a bear market, that would suggest SPY could drop to ~$558, or another 12% lower from here. Because Iran is reopening the Strait, or even an optimistic post by President Trump, could cause a sharp rally, the best approach is probably to use a narrow SPY put spread as a worst-case tail hedge. For example, one could purchase a May 1st weekly 570/560 put spread for about $1. If the S & P were to drop into formal bear market territory, that trade would pay 9:1. So, allocating 75 basis points of one’s portfolio to such a trade would cut the pain of a decline of more than 12% from here in half. However, bear in mind this is really an insurance play; our sincere hope is that the conflict temperature in the Middle East comes down and ships can once again transit the Strait. DISCLOSURES: None. All opinions expressed by the CNBC Pro contributors are solely their opinions and do not reflect the opinions of CNBC, or its parent company or affiliates, and may have been previously disseminated by them on television, radio, internet or another medium. THE ABOVE CONTENT IS SUBJECT TO OUR TERMS AND CONDITIONS AND PRIVACY POLICY . THIS CONTENT IS PROVIDED FOR INFORMATIONAL PURPOSES ONLY AND DOES NOT CONSTITUTE FINANCIAL, INVESTMENT, TAX OR LEGAL ADVICE OR A RECOMMENDATION TO BUY ANY SECURITY OR OTHER FINANCIAL ASSET. THE CONTENT IS GENERAL IN NATURE AND DOES NOT REFLECT ANY INDIVIDUAL’S UNIQUE PERSONAL CIRCUMSTANCES. THE ABOVE CONTENT MIGHT NOT BE SUITABLE FOR YOUR PARTICULAR CIRCUMSTANCES. BEFORE MAKING ANY FINANCIAL DECISIONS, YOU SHOULD STRONGLY CONSIDER SEEKING ADVICE FROM YOUR OWN FINANCIAL OR INVESTMENT ADVISOR. Click here for the full disclaimer.