MW An end to the Iran conflict should rally stocks - but only briefly
By Michael Brush
Private-credit cracks, high stock valuations and shaky IPO prospects will curb investors' enthusiasm
Any relief rally once Middle East hostilities are over will likely be short-lived.
Investors hoping the stock market will resume its bull run once the Iran conflict winds down may be in for a rude surprise. These several factors will hold the U.S. market back.
1. Valuations are rich: The S&P 500 SPX looks expensive in 18 out of 20 valuation metrics, Bank of America said in a research note published in late February. Five were at or near record highs.
The S&P 500 forward price/earnings ratio at 21 is still far above its long-term average of 16.1. On a trailing p/e basis, the benchmark index is at 25.7 times earnings compared with an average of 15 since 1900. On price-to-book value, the index recently traded at 5.59, the highest reading since 1978.
Using the measure favored by Warren Buffett, the market cap of the S&P 500 is 1.9 times GDP - the highest since 1964, Bank of America said in the report. Three other valuation metrics at or near record highs included enterprise value to Ebitda, price to operating cash flow and enterprise value to sales.
Many consumer-staples stocks look particularly overvalued and trade at high valuations compared with their growth rates, said David Giroux, manager of T. Rowe Price Capital Appreciation Fund PRWCX.
He singles out Coca-Cola Co. $(KO)$, which was recently priced at 24 times forward earnings, despite earnings growth of around 6%. Another example is Johnson & Johnson $(JNJ)$, at 21 times forward earnings, despite expected medium-term earnings growth of 7.4%, according to LSEG. That forward p/e is a 30% premium to J&J's five-year average forward earnings ratio.
Giroux also pointed to rich valuations in Costco Wholesale $(COST)$ and Walmart $(WMT)$. Walmart's recent forward p/e ratio of 43 is 58% above the trailing five-year average, said LSEG. "The valuations do not make sense relative to their growth rates," Giroux said in a recent interview.
2. A flood of stocks will hit the market: Another problem for the stock market is that several big initial public offerings (IPOs) will flood the market with a huge supply of shares. "This could represent a seismic supply shock," Bank of America strategist Savita Subramanian wrote in the February report. This will make it harder for the market to go up. Buybacks are slowing, contributing to the looming demand-supply imbalance.
Here is a pretty amazing statistic: The top three privately held companies today have the same value as the past 25 years' worth of U.S. IPOs combined, according to Bank of America. SpaceX has a valuation in excess of $1 trillion. Based on a recent funding round, OpenAI is worth more than $850 billion. Anthropic's IPO valuation could hit $500 billion.
3. The private credit overhang could get worse: There's turmoil in the private-credit sector of the debt market, and it could get worse, said Larry McDonald, who specializes in monitoring credit sector risk in his Bear Traps Report. That would weigh on the broader market.
Private credit refers to nonbank lenders, including private-equity firms and specialized funds. They typically lend to medium-size companies that can't readily access public debt markets. Private-credit lenders offer higher yields to investors to compensate for the heightened risks.
Those risks turned real last year following defaults and bankruptcies at the subprime auto lender Tricolor and the auto-parts supplier ?First Brands, among others. Investors are also concerned about private-credit funds that hold loans to software companies threatened by AI. "AI is destroying software companies," McDonald said.
Many private-credit investors have responded to these concerns by demanding their money back. Blue Owl Capital $(OWL)$, Blackstone (BX) and others in the private-credit arena are getting hit with redemptions. "Once the trust is broken, it evaporates very fast - and that is what is happening with these redemptions," McDonald said.
There's also a risk that credit problems could spread to banks, which may have exposure because of their lending to the private-credit lenders. Said McDonald: "Every four or five weeks, there is another cockroach. This is going to be with us for at least another quarter or two until the trust level comes back."
4. Private-equity issues could force pension funds to liquidate stocks: The private-equity sector overall is seeing hard times, too. The main challenge: Private-equity shops are having a hard time selling the companies they invest in. The amount of money raised in so-called "exits" fell to $244 billion last year from $528 billion in 2021, according to the Wall Street Journal.
"The industry's liquidity logjam comes as it sits on a stock of 32,000 unsold companies worth a stunning $3.8 trillion," Bain & Company wrote in a late February report on the private-equity sector. Resolving the problem will be a "multi-year process," according to a Center for Economic and Policy Research note published earlier this year.
Though these problems are at private companies, they may well put downward pressure on publicly traded stocks. That's because over the past decade or so, pension funds have sharply increased their exposure to private-equity investments. Now that they are getting record low distributions on these investments, these big institutional investors will have to sell more stocks to generate cash to meet pension liabilities, said Subramanian at Bank of America.
5. Seasonality is a headwind: Historically, the S&P 500 has performed poorly in the first half of midterm election years like this one. For example, in the 13 midterm election years since 1974, the S&P 500 fell 0.31% on average during the first three months and 0.49% in the first six months, McDonald noted.
The bottom line: If you are a long-term investor who dollar-cost averages into the market, carry on. If you are a trader hoping for a sustained rally once the Middle East hostilities cool, it's time for a reality check.
Michael Brush is a columnist for MarketWatch and authors the stock newsletter Brush Up on Stocks. At the time of publication, he had no positions in any stocks mentioned in this column. Follow him on X @mbrushstocks.
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-Michael Brush
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March 19, 2026 14:18 ET (18:18 GMT)
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