Brent crude has climbed back above $100 per barrel and the Strait of Hormuz, a critical artery for the global economy, remains closed. But the stock market is brushing off the turmoil.
The S&P 500 and Nasdaq Composite hit record highs on Wednesday, resuming a rally despite the rise in oil prices. It’s a stark shift from last month, when higher oil prices sent stocks lower.
The S&P and Nasdaq have rallied more than 12% and 18%, respectively, since their recent nadirs on March 30. The S&P is now up nearly 4% since the war began while the Nasdaq is up nearly 9%.
Markets are forward looking, and Wall Street is trying to look past the war. Investors are leaning in to optimism about US corporate earnings season and betting that the oil shock won’t last long enough to severely hinder economic growth.
Meanwhile, tech stocks are back in favor after sliding earlier this year over nerves about expensive valuations and AI disrupting the software industry. The tech rebound is supporting the market rally.
“The combination of improving Iran headlines, investor exhaustion over the volatility in March and a strong start to earnings season has helped to propel stocks to record highs,” Rick Gardner, chief investment officer at RGA Investments, said in a note.
Back at record highs
While the war has stirred up volatility, earnings results and estimates for US companies — core drivers of stock prices — remain strong.
Wall Street is in the midst of earnings season, with nearly a fifth of companies in the S&P 500 reporting quarterly earnings as of Wednesday morning. Of those companies, 86% beat expectations for earnings per share, a measure of profitability, according to FactSet.
Tech and AI stocks, which lagged the market in recent months, have also rallied: Tech is the best performing sector in the S&P 500 so far this month. The tech sector is estimated to account for 60% of earnings growth this year, according to analysts at research firm Strategas.
The tech sell-off in prior months made those stocks cheaper, creating a buying opportunity for eager investors. Some have scooped up tech stocks despite uncertainty over how a prolonged war with Iran could potentially disrupt supply chains, drive up inflation or impact earnings.
Venu Krishna, head of US equity strategy at Barclays, said that he is optimistic about tech and AI and that there are positive signs for the broader market. The underpinnings for the rally include spending on AI and defense, he said, adding that there is “extremely strong” momentum for earnings growth in the US.
“Oil moving around at these levels at this point is not derailing that momentum,” Krishna said. “Let’s see how the earnings season unfolds, but right now, the US is looking quite attractive.”
On March 24, when the S&P 500 was down nearly 5% since the war began, Krishna raised his year-end target for the index from 7,400 points to 7,650, expressing confidence in the market. A year-end target of 7,650 implies a 7% gain from yesterday’s close.
“Investors seem to be growing comfortable with the disruption of the crude and petrochemical markets,” Louis Navellier, founder and CIO at Navellier & Associates, said in a note. “Strong and rising earnings estimates, along with firm retail spending and stable labor markets, trump higher energy prices.”
“Momentum remains positive, and FOMO (fear of missing out) is growing,” Navellier said.
Too far, too fast?
The fierce ascent to record highs raises the question: Is the stock market being complacent about risks related to the prolonged war with Iran? Some investors urge caution.
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