The stock market isn’t ignoring Iran. It’s rising for these three very real reasons

The US-Iran war continues without a peace agreement being signed yet. Someone needs to tell the stock market.

After a small early decline near the start of the war, the S&P 500 rose to all-time highs and closed above 7,400 for the first time on Monday, although oil prices remained elevated.

Some say the stock market is ignoring the looming impact of the war, fueled by speculative activity. But there’s more to it than that.

There are very real root causes for the return; These include an economy that is much less dependent on oil to provide energy, strong corporate margins where energy costs are only a minor input, and technology companies whose businesses are insulated from the impact that will drive the S&P 500’s earnings forward.

The index quickly managed to recover from its March lows, recovering roughly 17% from around 6,300 in just over a month.

When the US first attacked Tehran on February 28, the S&P 500 lost only around 8% from peak to trough. In other words, it didn’t even fall into a correction, defined as a decline of greater than 10% and less than 20% that would theoretically follow an energy shock rippling through the global economy.

At its peak since the conflict began, oil rose above $120 a barrel and was most recently above $100. Gasoline prices have soared above $4.50 per gallon at the pump and above $5 in many states.

Many investors evaluated the market’s resilience over time; This means companies are hopeful that they will be able to handle supply chain disruptions caused by the Strait of Hormuz blockage as long as they are temporary and not too severe.

However, as stocks are recovering despite the US-Iran conflict entering its third month, it is now time to look at more constructive statements.

Here are some of them:

Low company impact

Even if the Strait of Hormuz reopens tomorrow, the damage has already been done. Experts in the field predict that it will take weeks for ships exiting the oil transit to reach their destinations in North America, Europe or East Asia. And even after doing so, high oil prices are not expected to return to where they were before the crisis; This means businesses and consumers around the world will face greater price pressures for some time to come.

However, when it comes to the US market, many companies will not be affected much by the change, at least according to their latest earnings estimates. A Trivariate Research review of 1,465 earnings transcripts since the beginning of March found that only 10% of the entire market cap of the US equity market expects a negative, or even mixed, impact from the US-Iran war. The firm said the 10 percent approach was an extreme estimate.

For investors, this means that the S&P 500 can continue to perform well even if certain parts of the market suffer. Trivariate Research is particularly wary of the consumer discretionary sector, where many companies already stand out for the impact the war has had on the consumer. The company stated that companies that have experienced more than one contraction since the year are names that should be avoided, such as certain software companies.

Amazing tech profit

The latest earnings season also underscored the importance of another pillar of the bull market: artificial intelligence.

Indeed, the largest companies in the S&P 500 are now the most extraordinary companies ever in terms of earnings. Torsten Slok, Apollo’s chief economist, noted that the 10 largest companies in the S&P 500 account for roughly 34% of the index’s total profits; this rate has doubled from 17% in 1996. JPMorgan’s trading desk noted last week that the Magnificent Seven companies’ earnings had reached levels not seen since, outperforming 493 other S&P 500 stocks by more than 40%. 2014.

Of course, this heavy concentration frustrates investors, who consider the risks of relying on a handful of names. But tech giants’ earnings acceleration during the first-quarter reporting season, rapidly expanding uses of AI, and rising capital spending have given investors confidence that market concentration is a feature, not a bug, and that the fundamental story of AI is solid.

oil independence

It is also a fact that the US economy is less dependent on oil than in past crises. The U.S. needs only about a third of the oil it needed in the 1970s to produce the same amount of GDP, Antonio Gabriel, global economist at Bank of America Securities, said in a note last month.

Gabriel noted that even if the war in Iran escalates, any oil price shock of 10 percent would have only a quarter-percentage point impact on inflation today, as opposed to the 0.90-percentage-point impact it had in the 1970s.

“A repeat of the 1970s seems an unlikely scenario,” Gabriel wrote.