If you wanted proof that the U.S. stock market is resilient, look no further than what’s transpired this year. Investors have shown extreme concern about artificial intelligence’s (AI’s) impact on the economy, a weakening labor market, slowing growth, and the ongoing conflict in Iran, which has pushed oil above $100 per barrel and made investors start to worry about possible stagflation.
Yet, as of this writing, the broader benchmark S&P 500 Index is down a measley 2% this year (as of March 17 close). That’s despite major sell-offs in stock markets across Japan, Saudi Arabia, and South Korea, among others. Can anything stop the S&P 500?
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Investors must always remember that the markets are unemotional, and money has no loyalty or moral compass. It often goes to the place where it can generate the best returns.
That said, I think most are fairly surprised by the S&P 500’s resilience. After all, oil prices have skyrocketed, and Iran has closed the Strait of Hormuz to certain ships, through which one-fifth of the world’s oil supply flows daily. Other tankers are simply avoiding the passage.
Image source: Getty Images.
There have also been reports of critical oil infrastructure being damaged in the Middle East, exacerbating concerns. Higher oil prices are likely to drive inflation higher, especially if the conflict in Iran is prolonged. Furthermore, recent data indicate the labor market may be weakening in the U.S., stoking stagflation fears.
So, how has the U.S. market remained so resilient? Well, the market does not yet seem to believe that the conflict will be a prolonged affair that leads to boots on the ground. If the conflict is somewhat settled over the next few weeks, elevated oil prices could come back down.
Furthermore, the conflict has led to a resurgence in the U.S. dollar, as investors have once again flocked to the world’s reserve currency as a safe haven. The dollar had been weakening, as President Donald Trump’s tariffs had led to a significant decline since the start of his second term. A stronger dollar can actually temper inflation by making imports cheaper.
Another factor seemingly helping the market is that Wall Street analysts keep raising their earnings estimates for the S&P 500 this year and in 2027. Ed Yardeni, a prominent market strategist who runs his own firm, Yardeni Research, recently noted that the aggregate forward consensus earnings per share for S&P 500 companies reached a record high of $328.80.
As of this writing, that means the S&P 500 trades at a forward earnings multiple of roughly 20.4, which is cheaper than what the index traded at earlier this year and last year.
The market is supposed to reflect what happens in the future. That’s why you’ll often see stocks trade on earnings projections that are one or more years out.
While the market can be right before individual investors realize it, it’s also possible that the market has miscalculated and failed to price in certain events. That’s where things get difficult, especially in the current environment. Has the market correctly priced in a short conflict in Iran, or is it being naive in assuming the conflict won’t be a longer affair?
Only time will tell, but I would think that if it becomes clear the conflict will last for months, the market would still have a good way to fall. That’s why I don’t think investors should be overly aggressive right now.
However, it’s also hard to believe that Trump would have the political support to extend the conflict or put boots on the ground, at least if he wants the Republicans to win midterms. Going into the conflict, it was already clear that one of the top priorities — if not the top priority of Americans — was affordability. If oil prices stay high, Americans will feel it.
Furthermore, since the conflict began, the odds of the Democrats retaking the Senate have risen significantly to 50%, according to Kalshi. So it is understandable why the market believes this conflict will not last long.
That said, many have miscalculated when predicting what Trump will do next. If U.S. involvement in the Middle East can be wrapped up quickly, I think the market can return to the highs it saw earlier this year and potentially even higher. But a prolonged conflict is the big risk.
Long-term-minded investors should not make most investment decisions based on near-term events, given the difficulty in predicting the future.
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Bram Berkowitz has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.
