Multiple factors, from reduced oil dependence to a profit growth narrative led by tech giants, have contributed to the unexpected resilience displayed by US equities during the Iran conflict. Since April, US stocks have staged a strong rebound, creating a stark contrast to the ongoing hostilities. While many attribute the improved market sentiment to former President Trump's repeated signals of an impending "US-Iran agreement," no such deal has materialized, and both sides have indicated readiness to continue fighting. The S&P 500 index began its decline as early as late January, a full month before the conflict started. The primary driver of this market downturn was "AI panic trading." Recent recommendations from institutions like Goldman Sachs, Morgan Stanley, and JPMorgan Chase to buy the dip in stocks previously battered by AI fears have, in fact, led this month's market rally. Inflation metrics confirm the market's calm. Since the war's onset, the US five-year breakeven inflation rate has risen by a mere 0.2 percentage points to 2.6%. The two-year US Treasury yield remains within the Federal Reserve's target range for short-term rates of 3.5% to 3.75%, indicating that markets do not anticipate the central bank needing to resume interest rate hikes to counter new inflationary pressures. A combination of relatively muted oil market reactions, largely stable inflation expectations, an uninterrupted tech-driven earnings growth story, and the deep-seated "buy the dip" mentality among retail investors collectively underpins the resilience of US stocks during wartime.
**The Truth Behind the March Decline: AI Panic, Not War** To understand why US stocks have been able to disregard the conflict, it's essential to correct a popular but inaccurate narrative—that the Iran war caused the market decline in March. In reality, the S&P 500 began a gradual descent in late January, a full month before hostilities erupted. The actual trigger was so-called "AI panic trading," where investors sold off stocks of companies perceived as threatened by artificial intelligence, including those in software, logistics, and white-collar services. This AI-induced sell-off persisted into March, coinciding with the outbreak of war, and the S&P 500 fell nearly 8% for the month. Approximately 60% of that decline was attributable to just 20 stocks, the vast majority of which are highly sensitive to AI sentiment, including the "Magnificent Seven" tech giants, plus Broadcom, Micron, Lam Research, and Applied Materials. The remaining 40% of the decline was concentrated in four sectors. While the industrial sector was indeed directly impacted by the conflict, the financial, healthcare, and other tech sectors were not directly affected by the war. Their individual contributions to the overall S&P 500 decline were almost negligible compared to the tech giants.
**Significantly Reduced Oil Dependence and Stable Inflation Expectations** For investors who lived through the 1970s, Middle East conflicts evoke painful memories of oil embargoes, inflation, and bear markets. However, the global economy's reliance on oil has decreased substantially. Currently, oil accounts for about 2% of global economic output, roughly a quarter of its share during the 1979 Iranian Revolution. Even within this smaller share, only one-fifth of the oil needs to transit the currently contested Strait of Hormuz. The actual movement in oil prices confirms this logic. After adjusting for inflation, oil prices nearly tripled from 1973 to 1974 and more than doubled from 1979 to 1980. Since the current conflict began, oil prices have risen by a relatively moderate 40%. Current spot oil prices are significantly higher than market expectations for prices in the coming months, even though there are no substantial signs of the conflict ending soon. The relative stability in oil prices has translated into similarly calm inflation expectations. Since the war began, the US five-year breakeven inflation rate has increased by only 0.2 percentage points to 2.6%. The two-year Treasury yield remains within the Fed's target range, suggesting markets do not expect the central bank to hike rates in response to new inflationary pressures. This certainty regarding the path of interest rates removes one of the key sources of uncertainty from valuation models.
**Tech-Driven Growth Cycle Shows Strong Immunity to Conflict** From a corporate fundamentals perspective, the US stock market's "immunity" to the war is also well-documented. While approximately 30% of revenue for S&P 500 companies comes from overseas, less than 3% originates from the Middle East and Africa. Even if persistently high oil prices were to suppress consumer spending and hurt sales, that pressure would first manifest as a significant rise in inflation expectations—a signal that has not yet appeared. Simultaneously, the market is enjoying a genuine, technology-driven growth cycle. According to analyst forecasts compiled by Bloomberg, the "Magnificent Seven" tech giants, plus Broadcom and Micron, are projected to contribute 70% of the S&P 500's expected 20% revenue growth over the next 12 months. While this highly tech-concentrated market may face risks from over-concentration and AI disruption, it is not one that can be shaken by a regional conflict in the Middle East.
**Retail Investors' "Buy the Dip" Mentality Acts as a Market Stabilizer** Another force that cannot be ignored is retail investors. Having experienced multiple market lessons, they have deeply internalized the strategy of "ignoring volatility and continuing to buy." They entered the market aggressively during the pandemic sell-off in the spring of 2020 and bought again during last year's tariff fears. This conflict has so far failed to provide them with a similar low-entry opportunity—partly because their own buying may have helped support the market. US stocks are approaching new highs not because the market believes the Iran conflict is nearing an end. The market did not truly care about this war from the beginning and likely will not in the future—unless the conflict escalates beyond the Middle East's borders into a global confrontation.
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