Since the outbreak of conflict in Iran, U.S. stock markets have defied international investor expectations, outperforming global peers with ease, a stark reversal from last month when they lagged significantly behind other world markets. Traders note that surging crude oil prices, coupled with U.S. energy independence and the U.S. dollar's resurgence as a primary safe-haven asset during the conflict, have provided substantial support for U.S. equities. Analysts suggest that the longer hostilities persist, the more likely U.S. markets are to maintain their outperformance. This week, the S&P 500 index remained largely stable, declining less than 1%, as gains in technology and energy stocks offset losses in other sectors. In contrast, the MSCI All Country World Index ex-U.S. fell by 6%, positioning the U.S. benchmark for its strongest relative performance since April. Adam Hetts, Global Head of Multi-Asset at Janus Henderson, stated, "The U.S. has historically represented a higher-growth, higher-quality segment of the global equity market. In the event of a broad market sell-off, this presents a valuable investment opportunity for clients. Currently, equities outside the U.S. are more sensitive to geopolitical risks and oil price volatility." This situation marks a complete reversal from February. At that time, the S&P 500 was largely flat, while overseas markets experienced significant rallies. Amid concerns that artificial intelligence posed a disruptive risk to U.S. stocks, the MSCI All Country World Index ex-U.S. recorded its largest gains since the worst of the financial crisis. The sharp volatility since the weekend indicates that market sentiment can shift rapidly with changing global dynamics. To date, Asian markets have been hardest hit by the Middle East conflict, with the MSCI Asia benchmark index falling over 6% by Thursday, though South Korean stocks rebounded after a record plunge. The MSCI Europe equity index declined approximately 5% this week. The reversal in the U.S. dollar's trajectory is a key factor behind the relative resilience of U.S. stocks, according to traders. The dollar strengthened against nearly all global currencies this week, pressuring emerging markets, which had previously benefited from a weaker dollar. The U.S. Dollar Spot Index has risen more than 1% this week. Keith Lerner, Chief Investment Officer and Chief Market Strategist at Truist Advisory Services, explained that the heavy reliance on oil in much of the world, exacerbated by the spike in crude prices, has increased investor anxiety toward international equities. On Thursday, WTI crude oil surged to its highest level in 2024 as investors worried that a protracted war in the Middle East could restrict oil production. Lerner added, "The U.S. is better positioned to withstand this situation due to measures that stimulate production and our energy independence." Another shift in market sentiment compared to last month is the growing narrative around technology stocks. Traders are now emphasizing their potential defensive qualities, citing strong earnings growth, rather than expressing concerns over high valuations and heavy investments in artificial intelligence. "Technology is now part of the safety trade," said Lerner of Truist. Consequently, other regions lack the foundational support found in U.S. markets, namely the relative resilience of the world's largest economy. Aoifinn Devitt, Global Wealth Managing Director at Moneta Group Investment Advisors, noted, "Fundamentally, European equities have been trailing U.S. stocks. Growth is slower there, without the impetus from tech development, and they are more exposed to oil imports and Russia-Ukraine tensions."
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