S&P 500 Hits Record High as Peace Hopes Outweigh War and
Inflation Risks
Investors appear to be treating an end
to the U.S.-Israeli war with Iran as a foregone conclusion, as the S&P 500
closes above 7,000.
·
Record Market Performance:
o S&P 500 rose 0.8% to cross 7,000,
hitting a new all-time high.
o Index now 2% above pre-war levels
and up ~10% since March 30
lows.
·
Investor Sentiment Driven by Peace Hopes:
o Markets buoyed by
expectations of a US–Iran
peace deal.
o Improved tone from
Donald Trump signaling conflict may end soon.
o Cease-fire and
diplomatic signals boosted confidence.
·
Resilience Despite Oil Shock:
o Rally continues even as
oil prices remain elevated
due to disruptions in the Strait of Hormuz.
o Investors appear to
believe “worst of the
conflict is over.”
·
Contradictory Economic Signals:
o High oil prices raising inflation
and hurting consumer confidence.
o International Monetary
Fund warned of slower
growth and recession risks.
o Christine Lagarde
flagged disconnect between markets and economic risks.
·
Strong Corporate Earnings Support Rally:
o Expected sixth consecutive quarter of
double-digit earnings growth.
o Major banks posted
strong results:
§ JPMorgan Chase reported
$17 billion profit.
§ Goldman Sachs,
Citigroup, and Bank of America also beat expectations.
·
Broad-Based Market Recovery:
o Over 80% of S&P 500 companies
have risen since March 30.
o Russell 2000 surged 12%, nearing record
highs.
o Gains extend beyond big
tech to wider sectors.
·
Export & Energy Dynamics:
o Energy stocks losing
momentum despite earlier gains from high oil prices.
o Consumer-focused firms
like General Mills and Dollar General remain over 20% down since war began.
·
Market Risks Remain:
o Many stocks (about two-thirds) still below
pre-war levels.
o Analysts warn of “two-sided risks”:
§ Conflict escalation
§ Prolonged energy
disruptions
·
Key Insight:
o Markets are pricing in a quick end to the conflict,
prioritizing strong earnings over macro risks—but this optimism could reverse
if geopolitical tensions worsen.
The
S&P 500 hit a fresh record high on Wednesday, reflecting investors’
optimism that a peace deal would be reached before the war in Iran could
inflict significant damage on corporate America.
The
benchmark stock index, which is widely watched across the world as a barometer
of the health of the U.S. market, rose about 0.8 percent to close above 7,000
and higher than its previous peak, reached in January. The index had already
erased its losses during the war in Iran and now sits 2 percent higher than it
was before the fighting began in late February.
Even
as a spike in oil prices has led to a gloomier economic outlook, investors have
been embracing signals in recent days that the United States and Iran could
restart talks that ended last weekend in Pakistan without a deal but with
comments from President Trump that he believed the war was nearing an end.
The
mere posture toward peace has helped to placate the stock market. Since the
cease-fire took hold last week, investors have noted a shift in tone by the
Trump administration that reflects a desire to end the conflict soon.
“The
market is trading assuming we have seen the worst of the conflict,” said
Stefano Pascale, an equity analyst at Barclays.
The
S&P 500 is now on course for its third straight week of gains, the kind of
winning streak not seen since October. The index has risen about 10 percent
since March 30 — the nadir of the recent sell-off.
Still,
some market watchers have been perplexed by the recent rally, which has taken
place as the Strait of Hormuz, the narrow waterway on Iran’s southern coast
that serves as a crucial shipping lane for the world’s oil supply, has remained
throttled. Even if a formal peace deal is achieved between the United States
and Iran, it could take a long time to get ships moving again and repair damage
to ports and other oil facilities. High oil and gas prices have been feeding
into rising U.S. inflation and tumbling consumer confidence.
The
International Monetary Fund said on Tuesday that disruptions to oil markets
could slow growth, fuel inflation and raise the possibility of a global
recession. Even if the war is short-lived, the damage to the global economy has
been done, the I.M.F. warned as it cut its forecasts for economic growth.
“What
is a little strange is that there is a tendency by some to assume that it’s
business as usual,” Christine Lagarde, the president of the European Central
Bank, said on Tuesday when asked about the seeming exuberance of markets at an
event held by Bloomberg in Washington.
The
longer oil markets are disrupted from the conflict, the greater the risk to the
global economy and to financial markets. But in a further sign that equity
investors already consider the end of the war to be in sight, stocks have
rallied in recent weeks even on days when oil prices have risen.
A
widely watched monthly fund manager survey by Bank of America, conducted over
the week through April 9, showed the most bearish outlook among investment
managers since June of last year. Expectations for economic growth plummeted in
the latest survey and the outlook for inflation shot higher.
But
importantly, few responded that they thought this would lead to a recession.
And without a recession, investors have been able to return to focusing on the
otherwise strong backdrop provided by corporate earnings that kicked off this
week.
Analysts
expect a sixth straight quarter of double-digit earnings growth, with some
anticipating the best earnings season in roughly five years. And that has
provided solid support for valuations to shrug off March’s market struggles.
“As
corporate earnings are the biggest driver of stock returns, this level of
steadfast earnings growth is an incredibly positive sign given that the market
has been hammered in the first quarter by the effective closure of the Strait
of Hormuz, which has sent oil prices skyrocketing to some of their highest
levels in decades,” said Hardika Singh, a strategist at Fundstrat.
JPMorgan
Chase, the banking bellwether, on Tuesday reported a $17 billion profit for the
first three months of the year, considerably more than analysts expected. The
bank slightly lowered its forecast for profits in the remainder of the year,
but still expects to earn more than $100 billion. Its executives expressed
worry about energy costs weighing on consumers but stressed that the labor market remained healthy. Goldman Sachs, Citi and Bank
of America also reported strong profits this week.
Bolstering
the signal sent by the S&P 500, the Russell 2000 index of smaller companies
— typically seen as more susceptible to economic shocks — has also rallied
sharply. The index has risen over 12 percent since March 30 and began trading
on Wednesday just 0.5 percent away from its January record.
Big
technology companies have led the S&P 500 higher but the recovery has been
broader than just the darlings of the artificial intelligence boom. More than
80 percent of the companies in the S&P 500 are now higher than they were on
March 30.
However,
just as the stock sell-off had been somewhat contained by an awareness that
this administration could change its mind quickly, many analysts are urging a
similar caution as the market now moves higher.
U.S.
stocks are still facing “two-tailed risks,” analysts at Bank of America noted.
The
rise in energy stocks, which had been boosted by the rise in oil prices
stemming from the war, has now faded. Shares of consumer staples like General
Mills or Dollar General remain significantly lower than before the war began,
with both companies down more than 20 percent since the end of February.
Roughly two-thirds of the companies in the S&P 500 remain lower than they
were when the war began.
“The
obvious risk is that we have not seen the worst of the conflict,” Mr. Pascale
said.