Veteran market strategist Ed Yardeni is warning that escalating conflict with Iran is sharply increasing the risk of a major selloff in U.S. stocks this year, Bloomberg reports.

Yardeni said he has raised the probability of a market “meltdown” to 35%, up from 20%, as the war drives oil prices above $100 and injects new uncertainty into global markets.

“The U.S. economy and stock market are stuck between Iran and a hard place currently. So is the Fed,” Yardeni wrote in a note to clients, describing what he called “fast-moving times.”

At the same time, he dramatically cut the chances of a euphoric market surge — often called a “meltup” driven by investor enthusiasm — to just 5%, down from 20%.

The strategist said the war’s impact on oil prices could put the Federal Reserve in a difficult position if energy costs remain elevated.

“If the oil shock persists, the Fed’s dual mandate would be stuck between the increasing risk of higher inflation and rising unemployment,” Yardeni warned.

Oil has surged past $100 a barrel, and investors are increasingly bracing for a prolonged conflict across the Middle East that could keep energy prices elevated. As a result, expectations for Federal Reserve rate cuts have already been pushed back.

Markets had previously expected the Fed to begin cutting rates by July, but traders are now betting the first move may not come until September — or possibly not at all this year.

The uncertainty has driven investors toward safer assets. The Bloomberg Dollar Spot Index has climbed nearly 2% since the war began, reflecting a rush into the U.S. dollar as a haven.

U.S. stocks have so far held up better than many global markets, though they are still feeling pressure. The S&P 500 fell about 2% last week, compared with a 3.7% drop in global equities, according to MSCI’s broad index.

Still, signs of growing stress are emerging. Hedge funds have increased short bets against US equity ETFs, while the Cboe VIX volatility index surged to its highest level since April’s tariff turmoil.

Yardeni noted that while risks are rising, his broader outlook for the economy remains relatively optimistic.

He continues to assign a 60% probability to his “Roaring 2020s” scenario, which envisions strong U.S. economic growth fueled by productivity gains.

Over the longer term, Yardeni sees an 85% chance that the Roaring 2020s continue, though he assigns a 15% probability to a “stagflating 1970s redux.”

“If investors start expecting stagflation, a bear market is more likely,” Yardeni said.