By Lewis Krauskopf
NEW YORK, April 14 (Reuters) – The U.S. stock market is back to where it was when the Iran war began over six weeks ago, which investors say is a reflection of bets that the conflict will not be long-lasting. But what if that thinking is wrong?
The benchmark S&P 500’s round trip comes despite a sharply different investing backdrop compared with February 27, just before the U.S.-Israeli military strikes began the Middle East conflict. Oil prices are some 40% higher. Concerns about inflation have driven up benchmark Treasury yields. Those same concerns have led markets to largely rule out previously anticipated interest-rate cuts this year.
All of those factors could present obstacles to stock performance, should they persist.
“There’s a lot of complacency that this can resolve itself fast. What’s priced in is that we have an off-ramp,” said Brad Conger, chief investment officer at Hirtle Callaghan, which oversees assets from endowments and foundations. “I think we’re a lot worse off than February 27th, and we’re at the same price.”
Investors are seizing on what they see as a solid economic backdrop, in particular a strong outlook for corporate profits that has actually improved since the war began. They are also mindful of the stock market’s resilience during this three-year-old bull market and wary of missing out on rallies.
WAR RISKS VIEWED AS FLEETING
The S&P 500 has rebounded after dropping in the initial weeks after the crisis began. The index in late March closed down over 9% from its late-January all-time high, nearly reaching a 10% decline that would have indicated a correction. The S&P 500 on Monday closed up 0.1% since the war began, and just over 1% away from its record high. Stocks were moving higher again on Tuesday, with the S&P 500 last up 1% on the day.
Optimism about a resolution accelerated following a two-week ceasefire agreement reached last week. But much about the situation remained uncertain and investors were still bracing for war-related developments to drive asset volatility.
The market was looking at “temporary risks which will be overcome in fairly short order, as opposed to being the start of a new … regime of higher inflation, higher energy prices, higher interest rates,” said Peter Tuz, president of Chase Investment Counsel Corp. “Because if that were the new regime, there is very little reason to believe the market would be as strong as it is right now.”
OIL HIGHER NOW, LESS SO LATER?
Central to the performance of stocks is the movement in oil prices. Sustainably higher crude prices stand to pressure consumers who have to spend more on gasoline, while also raising costs for businesses.
One sign that investors are expecting the war to wind down in the near term is markets showing that oil prices are expected to be more moderate by year-end, said Angelo Kourkafas, senior global investment strategist at Edward Jones. The front-month contract for U.S. crude is hovering at around $95 a barrel, while the December contract is at $77, according to LSEG data.
“Markets are now seeing the energy disruption as something that is near-term,” Kourkafas said. “There is this notion that, yes, there is a lot of near-term disruption, but it is temporary in nature. And then once we go past that, we’re going to go back to the prevailing economic resilience that we had before.”
The rise in oil prices has already influenced U.S. inflation, with the monthly Consumer Price Index rising in March by the most in nearly four years.
Inflationary fears have led investors to dial back expectations for Federal Reserve rate cuts, which had been a source of optimism about U.S. equities heading in to the year. Fed funds futures were last pricing in just 6 basis points of easing by December, according to LSEG data as of Tuesday, or less than one standard 25-basis-point cut. Prior to the war, roughly two such quarter-percentage-point cuts had been expected by December.
Oil-driven inflation is also a main culprit driving up Treasury yields. The benchmark 10-year Treasury yield was last around 4.3%, up from 3.96% on February 27.
Higher benchmark yields could present headwinds for equity performance, including by translating into higher borrowing costs for companies and consumers.
EARNINGS OUTLOOK BUOYS STOCKS
One positive factor for stocks since the war began: Estimates for U.S. corporate profits are even more robust. S&P 500 companies are expected to increase earnings by 19% in 2026, up from an expected 15% increase just before the war began, according to LSEG IBES.
The increased earnings outlook has arguably made stocks look more enticing. The price-to-earnings ratio for the S&P 500, based on profit estimates for the next 12 months, stood at 20.4 on Monday, down from over 23 in late October, according to LSEG Datastream.
“Estimates keep going higher despite the surge in oil prices and the implications that has for inflation,” said Chris Fasciano, chief market strategist at Commonwealth Financial Network. “More attractive valuations and higher earnings estimates make me feel OK about the backdrop.”
The upbeat earnings outlook will be tested in the coming weeks as companies report their first-quarter results.
“People are really expecting astounding earnings growth from companies in aggregate this year,” Tuz said. “It’s way too early to say whether it’s going to prove to be an accurate number or not.”
(Reporting by Lewis Krauskopf in New York; Editing by Colin Barr and Matthew Lewis)
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