Just weeks ago, it all felt so easy. Jerome Powell was poised to kick off the great monetary pivot in earnest thanks to the steady demise of inflation, while Corporate America’s famous profit machine vindicated the euphoria on Wall Street and beyond.

Now after a week of geopolitical tensions and bond volatility, life is getting harder for money managers who are sitting on some of their highest exposures to stocks and credit combined in a decade.

Among the pressure points: News that Israel is bracing for an unprecedented attack by Iran on government targets — spurring the S&P 500’s worst week since October as stock volatility jumped Friday while Brent crude settled above $90 per barrel. Earlier this week, a hotter-than expected inflation print pushed 10-year yields above 4.5%, pushing the dollar higher.

With the likes of Goldman Sachs Group Inc. and Barclays Plc curbing their rate-cut bets for this year, the valuation-be-damned risk-on playbook of 2024 looks dangerous to a growing cohort of investment pros. Even stock bull Ed Yardeni is issuing words of caution as Middle East strife saps the momentum of equities and raises the prospect of $100 oil.

“The S&P 500 has had a nearly vertical ascent,” said a Yardeni Research Inc. note to clients Friday. “That might be it for a while, especially if push does come to shove between Israel and Iran.”

Tolerance for bad news is lower than it has been for a while. Fund managers have already seen their exposures to equities and corporate bonds jump to two thirds of their overall assets thanks to this year’s risk rally, according to Societe Generale SA. And allocations to cash by non-bank investors are hovering around the lowest level in the past decade, according to JPMorgan Chase & Co analysis.

“If the confidence in growth stays, then risk allocation could stay at two thirds, but it doesn’t go higher historically,” said Manish Kabra, SocGen’s head of US equity strategy.

The Nasdaq 100 fell 0.6% this week and the S&P 500 closed down 1.6%. A mixed start to the earnings season added to worries as Wells Fargo & Co. and JPMorgan missed estimates for net interest income while Citigroup Inc.’s profit topped estimates.

A big repricing in the world of Treasuries also weighed on sentiment. Traders are now expecting under two interest-rate reductions by the Federal Reserve this year, less than even the central bank itself is indicating in its so-called dot plot. Goldman’s team of economists led by Jan Hatzius currently projects two cuts — down from five — while Barclays’ analysts see only a single rate cut happening this year.

“I don’t think we get a cut unless the labor market really breaks and we go into recession,” said Adam Abbas, portfolio manager at Harris Associates, who has been selling high-yield bonds and bidding up floating-rate loans.

At Northwestern Mutual Wealth Management, signs of elevated prices have spurred the $300 billion asset manager to further reduce stock exposures while continuing to lift allocation to fixed income.

“Inflation is sticky. It will be difficult for the Fed to cut rates,” said Matt Stucky, the firm’s chief equity portfolio manager.

To be sure, many on Wall Street have been skeptical of prospects for an aggressive monetary-easing cycle all year, and one week’s bad news needn’t be an occasion for a wholesale revision in positioning.

Josh Kutin, head of North America asset allocation at Columbia Threadneedle Investments, says rate cuts may be pushed to next year, but this is no reason to take risk off the table. The $72 billion money manager is overweight equities and underweight cash as he sees economic resilience supporting stocks.

“These could be pushed out to 2025 or later, which is definitely a realistic outcome, particularly after this week,” said Kutin, referring to rate cuts.

Yet as Israel-Iran tensions fester, all bets are off with market sentiment deteriorating in late Friday trading, sending Wall Street’s so-called “fear gauge” to October levels.

“I’ve been in the camp market is underpricing geopolitical risk,” said Peter Tchir, head of macro strategy at Academy Securities Inc. “Most of the hedging seems to be focused on options with VIX posting a decent gain.”

This article was provided by Bloomberg News.