Despite the ongoing Middle East conflict for over a month, U.S. stock markets have recovered their losses. In recent times, Wall Street has been selectively filtering out market noise. The S&P 500 has surged nearly 10% since March 27, while the Nasdaq 100 has gained approximately 12% over the same period, marking its longest winning streak since 2021 with ten consecutive days of advances.
More importantly, the S&P 500 has completely erased all declines incurred since the outbreak of hostilities involving Iran during Monday's trading session.
One market observer noted that equities appear to have declared victory in the confrontation with Iran, even though the conflict itself remains unresolved. While some believe Iran is merely biding its time, the absence of escalation by Houthi forces in the Red Sea, no increase in drone attacks, and maintained ceasefire agreements have surprised analysts. Although declaring victory might be premature, stock markets clearly perceive the situation as stabilized.
Another strategist highlighted the remarkable fact that the S&P 500 has gained 1.6% year-to-date despite the geopolitical turmoil over the past month, a scenario that seemed improbable just last week. Stocks are forward-looking instruments, and markets cannot afford to wait for resolutions to problems they anticipate will eventually be solved—this dynamic explains current market behavior and the recovery of strong performance.
Market logic is shifting. Equities and broader financial markets appear increasingly indifferent to developments in the Strait of Hormuz.
In overnight trading, leading artificial intelligence companies demonstrated notable strength. The cohort of major technology stocks rose 3% and has climbed 15% over the past ten sessions, advancing in nine of those ten days.
Semiconductor stocks have been significant drivers of this rally. Industry profit expectations jumped approximately 10% over three trading days, providing substantial lift to overall S&P 500 earnings per share forecasts. Two prominent chip companies are projected to contribute over 50% of the S&P 500's EPS growth this quarter.
This rebound extends beyond equities. Treasury yields declined alongside falling oil prices, dropping about 3 to 4 basis points across the curve. Bitcoin surpassed $76,000, reaching its highest level since the conflict began. Gold traded above $4,800, its strongest showing since March 18. The U.S. dollar continued to weaken, nearly erasing all gains made since the outbreak of war.
Market liquidity is returning to normal levels. Liquidity for S&P 500 constituents has recovered significantly from its lows during peak geopolitical uncertainty, now standing substantially above its 20-day average. ETF trading volume as a percentage of total market activity has also retreated from its recent peak.
An interesting phenomenon is the recurrence of familiar market patterns from previous administrations.
Market participants are engaging in one-directional chasing of rallies, forcing short sellers to cover their positions. A seasoned equity trader described capital flows as unidirectional, noting that various investors who were previously underweight risk exposure are now buying into strength.
This pattern of urgent buying stems from multiple converging factors: Institutional investors are leading the rebound as attention returns to supportive fundamental data following substantial earlier selling. Systematic funds are purchasing aggressively, while long-only and hedge funds are net sellers, particularly in technology, industrial, and communication services sectors—effectively transferring positions to buying programs. Short covering has accelerated dramatically, with heavily shorted stocks experiencing sharp rallies.
The sustained strength of major technology stocks is attributed to four factors: geopolitical improvement triggering index hedge repositioning, stabilization of sector rotation trends that began in the first quarter, early positioning for strong earnings season expectations, and ongoing share repurchase programs.
The transition in market narrative finds support in incoming data. This week's earnings reports from major financial institutions typically serve as a barometer for overall U.S. economic health. Recent results indicate households and businesses remain resilient despite concerns about inflation, artificial intelligence, private credit, and consumer spending.
Inflation data provides additional support, with the latest producer price index reading coming in below expectations. However, some analysts caution that markets are increasingly interpreting this data through the lens of its transmission to other inflation measures, tending to view soft readings as lagging indicators while anticipating persistent inflationary pressures.
A notable divergence exists between equity and oil markets. Oil futures declined below $91, with market indicators suggesting increasing probability of further declines. The immediate triggers for oil's weakness include reports of potential export adjustments to facilitate negotiations and ongoing discussions about subsequent peace talks.
Market data from oil futures curves indicates expectations for prolonged supply disruption resolutions—contrasting sharply with equity markets' declared victory mentality.
This contrast underscores how stocks, as forward-looking instruments, cannot afford to await solutions to anticipated resolutions, explaining their current outperformance.
Despite improved market sentiment, several strategists maintain cautious outlooks. Uncertainty surrounding the conflict and its ripple effects keeps the risk of growth-related corrections elevated. If the fundamental narrative surrounding the war or its impacts changes, equities could face renewed downward pressure from valuation perspectives, potentially falling deeper than previous lows.
Some analysts express skepticism about the S&P 500 breaking through record highs before substantive diplomatic progress occurs. However, once achieved, conservative positioning, strong fundamentals, and reset expectations could unleash significant pent-up momentum.
Bond investors remain skeptical about sustained inflation improvement, noting the difficulty of predicting future data releases and the unlikelihood of consistently lower readings.
Other veteran strategists maintain more optimistic views, suggesting financial markets are learning to coexist with the Iran conflict similar to previous geopolitical events, and reiterating their assessment that market bottoms were established in late March.
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