Middle East Conflict Drives Stock Markets Lower
Key points 1. The U.S. stock market is increasingly showing signs of a market top. 2. Geopolitical instability favors physical resources and the defense industry. 3. The crypto market remains surprisingly stable.
This content has been produced by Kvarn Capital Oy, a licensed crypto-asset service provider supervised by the Finnish Financial Supervisory Authority. This content is intended for informational purposes only and should not be interpreted as investment advice or recommendation. All investing in crypto-assets involves significant risks, and past performance is not a guarantee of future returns. Crypto-assets are not covered by investor compensation schemes or deposit guarantee schemes.
Quick Recap: Last Week
Last week, the Kvarn Pulse newsletter was written during the first week of the military actions in the Middle East. At the time, we noted that European stock markets, in particular, reacted strongly to them, while the U.S. markets remained relatively stable. We summarized our analysis then into three points:
- War in the Middle East shakes the European stock market
- Metals and the mining sector still look strong
- Bitcoin over $71,000, will we see a break-out?
Stock market in downtrend
Three weeks ago, on February 19, 2026, we titled our Kvarn Pulse newsletter "S&P 500 topping?".
We wrote at the time:
"Last week, we pointed out that this kind of sideways stagnation in the S&P 500, coupled with capital rotating out of the tech sector that led the rally and into more defensive sectors, is often textbook market-topping behavior. When combining these observations with the S&P 500's continued weakness over the past week, we are forced to seriously consider the possibility that we are approaching some form of a market top, at least a local one."
As we wrote this, we did not yet have sight of the Middle East conflict that would break out a week later, nor its impact on global energy markets. The stock market had, however, in our assessment already started to look fragileand vulnerable to any negative catalyst.
Looking back three weeks later, it increasingly looks like the Middle East conflict was the negative catalyst that broke the back of a stock market that had already lost its upward momentum.
In several previous Kvarn Pulse newsletters, we have highlighted the 6,800-point level of the S&P 500 index as an important watershed. Over the past week, the S&P 500 index has dropped below this level and has not been able to rise above it.
Currently, the S&P 500 index has therefore not only lost its short-term support level, but has also fallen below its 20-day, 50-day, and 100-day moving averages. Of these, the 20-day and 50-day moving averages have already turned downwards, with the 100-day moving average still barely rising.
What should we make of this?
At the beginning of February, when the S&P 500 index failed to cross7,000 points, it began to look like we had transitioned from an uptrend to sideways movement. After dropping below the 6,800-point limit this week, it is starting to look like we are no longer moving sideways, but are in an outright downtrend.
Below 6,800 points, it is reasonable to assume that we are at least in a correction. The next natural question is:
Will the current price drop remain a correction within an ongoing uptrend, or have we entered an outright bear market?
In answering this question, we set the 6,550-point level as a critical inflection point.
The 6,550-point region is the area where the previous price drops of the S&P 500 index stopped in October–November. It also happens to be around the same level where the 200-day moving average currently sits.
Right now, we think the U.S. stock market looks quite risky. The indices are still relatively high, but momentum has turned downward. Until we see the S&P 500 index at least return to its previous range between 6,800 and 7,000 points, we will treat it with great caution.
Our baseline assumption is also that wherever the U.S. stock market goes, the rest of the world will follow in the same direction with some minor variance, especially if the direction is still downward.
Last week we wrote about the sharp drop in the European stock market. We wrote that this steep decline looked primarily like a "mean reversion," because before the military operations in the Middle East started, the European stock market had performed exceptionally well.
A week later, it looks like this "mean reversion" is over for now, and over the past week the European stock market (VGK) has moved more or less in tandem with the U.S. (SPX).
Looking at a three-month timeframe, Europe's strong outperformance and last week's correction are clearly visible. As long as the three-month view remains favorable to Europe, we consider it relatively more attractive than the U.S. stock market.
If the stock markets as a whole look risky right now, where do we see opportunities?
Over the past week, we have seen four key themes that seem to react positively to the uncertainty caused by the Middle East conflict. As a benchmark for these, we have set the iShares Core MSCI World ETF (IWDA), which invests in the global stock market.
Amundi STOXX Europe Defense ETF (EDFS) investing in the European defense industry, WisdomTree Agriculture (AIGA) investing in agricultural commodities, iShares MSCI World Energy Sector (5MVW) investing in the energy sector, and Xetra Gold (4GLD) investing in gold have all been rising strongly over the past week.
With the exception of agricultural commodities, the rise of these themes seems to not be dependent on the outbreak of the Middle East conflict.The energy sector, the defense sector, and gold had already been rising very strongly in the preceding months.
The short-term development of the stock market is naturally highly dependent on the events of the Middle East conflict, and its possible escalation or de-escalation. These shifts, in turn, are the result of political decision-making, which is quite difficult for a retail investor to predict.
It is therefore good to be aware that the developments if the financial markets are exceptionally hard to predict right now, and the possibility of sudden turns (in either direction) is elevated.
For now, however, we keep working from the assumption that geopolitical instability will continue and the markets will remain in a "risk-off" mood, which acts as a clear burden on the stock markets, with the exception of individual sectors like energy and the defense industry.
Crypto Market Stable
While the stock market has been in turbulence since the start of the Middle East conflict, the crypto market has remained surprisingly stable.
A week ago in the Kvarn Pulse newsletter, we noted that Bitcoin's price had risen above $71,000, which made us prepare for the possibility of a "break-out". Shortly after writing the newsletter, such a break-out was indeed seen, but so far it seems to have remained short-lived.
There has not yet been any continuation of the rally in Bitcoin's price, which makes last week's price movement look a bit like a repeat of the "fake-out" seen in January.
We do not yet rule out the possibility of the crypto market shifting into an uptrend, but considering the weakness of the stock market and the general risk-off mood of the financial markets, our baseline assumption is somewhat "bearish," and we will have to require clear evidence from the crypto market before shifting our expectations more bullish.
In last week's Kvarn Pulse newsletter, we offered the following advice for navigating the crypto market:
"As a rule of thumb, we therefore offer the interpretation that Bitcoin's price:
- below $72,000 looks like an unequivocal continuation of the bear market
- between $72,000 and $97,000 looks primarily like a "bear market rally"
- above $97,000 looks like an unequivocal new bull market"
These guidelines are still valid, and as long as we do not see Bitcoin's price rising sustainably above $72,000, our baseline assumption is the continuation of the downtrend.
However, we draw attention to the fact that the crypto market has remained remarkably resilient over the past two weeks, considering the general "risk-off" mood of the broader markets.
We need more evidence to be sure whether this is just a difference in timing (i.e., the crypto market's January drop simply preceded the stock market's decline) or genuinely increasing relative strength. In any case, every week that the crypto market remains stable while the stock market drops certainly increases our confidence in it.
The stock markets in a downtrend, with basic resources and defense industry rallying, and the crypto market trading sideways. The market situation remains interesting, and surprising turns seem almost to be expected. Whatever happens, we will continue to monitor the situation and keep you up to date, so stay tuned!
The information and sources presented are for illustrative purposes only. While obtained from sources deemed reliable, their accuracy cannot be guaranteed.