From threats to “destroy civilization” to a two-week ceasefire, the situation in the Middle East is ever-changing—unpredictable! Wall Street urgently drafts a “war trading guide”

Zhitong Finance APP learned that, due to investors’ concerns about uncertainty regarding the prospects for a ceasefire, some large Wall Street investment banks are drawing up a series of trading strategy plans related to conflicts with Iran.

In the late trading on Tuesday, U.S. stocks rebounded, as traders analyzed various conflicting pieces of information about where the war might be headed. Earlier the previous day, Pakistan’s prime minister called on U.S. President Donald Trump to extend by two weeks the final deadline for Iran, while also urging Iran to agree to Trump’s demand to open the Strait of Hormuz. On Wednesday morning, Trump agreed to a two-week ceasefire, and reports afterward said that both Tehran and Israel accepted the ceasefire agreement.

Wall Street trading desks serving global institutional investors are preparing for sharply different outcomes: if tensions ease, possibly resulting in a rebound because the market has fewer positions; if Trump threatens to destroy Iran without reaching an agreement, then there could be a sharp selloff.

Below is how the trading desks of four major investment banks are preparing to deal with a wartime scenario:

Goldman Sachs

Goldman Sachs partner and global head of its hedge fund business Tony Pasquariello said traders are dealing with multiple scenarios rather than a single base case.

“In my view, you now have to ask how the market will react to the ‘mission accomplished’ headline, and you also have to ask how the market will react to the ‘45-day ceasefire’ headline, and you have to ask how the market will react to the ‘ground forces moving in’ headline,” Pasquariello wrote in a report to clients on Monday.

Pasquariello said traders do not really have insight into which war outcome is most likely. “Although I have some intuition on these questions, I definitely don’t have any advantage,” he wrote, adding that it is difficult to justify setting up an aggressive tactical positioning.

Instead, he urged investors to stay cautious, suggesting they focus on highly liquid securities and reduce overall exposure. Given the “volatility” of momentum trading, he said: “I recommend lowering your total stock exposure.” He also added that those hoping to go long should consider options strategies, such as bull call spread strategies.

JPMorgan Chase

JPMorgan Chase’s trading desk is simulating three scenarios—bullish, bearish, and maintaining the status quo—each with very different impacts on the market.

If the situation eases or policy shifts, JPMorgan traders expect a broad-based “full rally,” including stocks rising, bond yields falling, oil prices dropping, credit spreads narrowing, and the dollar weakening.

Small-cap stocks will lead the way, with technology stocks and the overall market following. Cyclical sectors—especially non-essential consumer sectors such as homebuilders and retailers—are expected to outperform the broader market, while the financial sector could benefit from improvements in the macroeconomic environment and the steepening of the yield curve. Gold and mining stocks may rise as the dollar weakens, while energy stocks may lag. The bank said emerging markets will outperform developed markets, with the Asia-Pacific region and Latin America leading this trend.

If negotiations fail and military conflict escalates—along with further disruptions to key energy transportation routes—oil prices would spike. JPMorgan expects WTI crude prices could break above $125 per barrel and move closer to $150.

Such a shock could also push up yields due to the risk of stagflation, strengthen the dollar, widen credit spreads, and put broad pressure on equities.

Against this backdrop, JPMorgan traders wrote: “In the stock market, all energy-related stocks need to be bought.” They also added that a prolonged conflict would boost renewable energy, defense companies, and parts of the industrial supply chain. Most other sectors would face pressure, especially industries such as aviation. The bank warned that this “sell everything” approach could create an indiscriminate situation, even if some companies show a stronger ability to navigate a recession.

Maintaining the status quo means easing tensions to a limited extent; while it may temporarily stabilize the market, it would leave structural constraints, including reduced shipping volumes and ongoing economic damage.

JPMorgan’s global markets intelligence head Andrew Tyler wrote: “If Trump walks away from threats to attack Iran’s infrastructure—apparently preventing Iran from attacking Saudi oil production while also preventing the Houthis from blocking the Red Sea shipping lane—then that would be a brief victory.”

Citigroup

Citigroup’s trading desk believes that a potential deal with Iran would be a positive catalyst for U.S. raw materials stocks and the South Korean stock market. “These sectors are generally negatively affected by falling oil prices and have underperformed, so we have been looking for areas that align thematically with our expectations,” said Stuart Kaiser, head of U.S. equity trading strategy at Citigroup.

In the case of a temporary ceasefire, Kaiser prefers to hold long-term high-growth and momentum stocks, including companies such as Ciena (CIEN.US), Western Digital (WDC.US), Seagate Technology (STX.US), AMD (AMD.US), Alphabet (GOOGL.US), Micron Technology (MU.US), and Rocket Lab (RKLB.US).

If the situation escalates, the bank recommends going long in aerospace and defense, energy, and retailers of food and everyday consumer goods, while going short in durable consumer goods and home goods. Globally, Citigroup believes European and Japanese stock markets face downside risk because they are more dependent on energy inputs and transportation costs.

Barclays

Barclays’s trading desk believes the market should pay less attention to specific outcomes and more to whether there is a credible path to de-escalation.

“What the market should consider is whether there is a final exit route here,” wrote Alexander Altmann, Barclays global equity tactical strategy head, adding that if negotiations continue, then the near-term deadline may be less important.

Altmann pointed out that overall investor positioning is light; the allocation of volatility control funds to U.S. stocks has fallen to 56%—the lowest level since July last year—and the long/short ratio for hedge funds is also close to the lowest level in the past year.

“This could catch the stock market off guard, especially if this happens within one or two days after tonight’s deadline,” he wrote.