US stock traders are unprepared for a correction in the S&P 500 that would see the gauge fall as much as 10% from its peak as a result of the war in Iran, according to JPMorgan Chase & Co.’s trading desk.

Andrew Tyler, JPMorgan’s head of global market intelligence, turned “tactically bearish” on US stocks Monday as the Middle East conflict showed no signs of abating, sending oil above $100 a barrel. A correction would mark a 10% drop in the US benchmark from its peak, implying the S&P 500 would drop to roughly 6,270 points — or roughly 7% lower from where the index closed on Friday.

Investors aren’t positioned for a drop and “there has been a lack of extreme de-risking with positioning currently neutral,” Tyler wrote. He said energy stocks were sold on a net basis last week as traders were “expecting de-escalation.”

Instead, oil prices jumped to over $100 a barrel over the weekend after several Gulf states cut oil production raising concerns of a lasting supply shock and risks of stagflation.

For Tyler, these risks could quickly subside if the conflict isn’t prolonged.

“A definitive off-ramp to the conflict will end this tactical call as the underlying macro fundamentals remain supportive of risk-assets,” he wrote.

Written by: Geoffrey Morgan @Bloomberg

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