U.S. equities climbed to fresh records this week even as a conflict in the Middle East, a major disruption to oil flows and warnings of slower growth persist — a puzzling gap between headlines and market behavior that matters for anyone with money in stocks. Investors appear to be betting that today’s shock will fade within months, a stance that shapes portfolio risk and the near-term outlook for prices and inflation.
Why prices are still moving higher
After an early sell-off tied to the outbreak of hostilities on Feb. 28, the benchmark S&P 500 has recovered and pushed to new highs. The index dropped roughly 8% from the start of the conflict through late March, then climbed back and was about 11% above that low when it reached fresh records this week.
That rebound reflects a simple market reality: equity prices are based on expectations about future earnings and conditions, not a snapshot of the present. “Markets are looking ahead — six to 12 months out,” said Joe Seydl, a senior markets economist at J.P. Morgan Private Bank, summarizing a widely used view among strategists.
Investors are interpreting diplomatic signals — a temporary ceasefire and resumed shipping in the Strait of Hormuz — as signs the disruption to oil supplies will be short-lived. Oil flows through that chokepoint account for a large share of global crude and natural gas transport; when they stall, prices surge and feed through to broader inflation and growth concerns.
What helped stocks snap back
Several factors have underpinned the market’s resilience.
- Strong demand for technology and AI-related companies. Tech firms make up a disproportionate share of the market’s value and have driven much of the recent gains.
- Solid corporate earnings expectations. Analysts still expect companies to deliver earnings growth over the next year, cushioning the hit from higher energy prices.
- Policy and tax shifts. Recent U.S. tax provisions that encourage upfront deduction for business investment are supporting after-tax profit estimates.
“Those tech names have their own momentum, independent of geopolitical headlines,” said Mark Zandi, chief economist at Moody’s. That momentum can offset pressure from other sectors when investor sentiment turns favorable toward innovation and productivity gains.
Short bursts of positive diplomacy have also mattered. A ceasefire and signals that tank traffic may resume reduced the immediate premium investors had placed on energy risk, prompting buying in equity markets.
Markets remember past scripts
Traders and investors often price assets based on how political actors have behaved in prior crises. Market participants recall episodes when White House moves that initially roiled markets were later softened or reversed — a dynamic that can blunt downside risk.
One episode cited by economists: a 2025 episode of tariff announcements that initially sent markets sharply lower, only to see authorities pause the measures soon after, triggering a rebound. That pattern — rapid escalation followed by de-escalation when economic pain mounts — helps explain why some investors expect a relatively short conflict and therefore limited long-term economic damage.
How big the risks still are
Despite the rally, economists warn the upside depends on the conflict not widening or dragging on. Pierre-Olivier Gourinchas, director of research at the IMF, noted the temporary calm does not erase the harm already done and that downside risks remain pronounced.
If the dispute becomes prolonged or if major powers stay engaged, the market’s current assumptions could be wrong. Mark Zandi says that failure to de-escalate could trigger a “full-blown correction” — a drop of 10% or more from recent highs — or worse.
What to watch next
Key indicators that will influence the path of stocks in coming weeks include:
- Durability of the ceasefire and whether tanker traffic through the Strait of Hormuz stays unimpeded.
- Oil price trends: sustained spikes would squeeze consumers and corporate margins, raising recession risk.
- Corporate profit revisions: downgrades across major sectors would undermine the case for higher equity valuations.
- Policy responses from the U.S. and other major economies, including any fiscal measures or escalatory military moves.
For long-term investors, the practical takeaway from strategists is familiar: market timing is difficult. “Taking a long-term perspective and riding out volatility is usually a better approach than trying to trade around headline events,” Seydl said.
That advice matters because the current market position — bullish but conditional — leaves room for sharp swings. If the market’s expectation of a short-lived disruption proves accurate, stocks may continue higher. If it does not, volatility and downside risk could rise quickly.
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Jordan Keller specializes in analyzing the US financial markets. With concrete recommendations, he helps you secure and boost your investments by providing strategies that adapt to market fluctuations.